Stock markets fluctuates continuously in the mid-term to long-term horizon. Sometimes there is a very strong growth, sometimes there is a very strong decline. Among the major factors that influence this fluctuating belong the macroeconomic dynamics of the global economy, changes in the monetary policy of the key central banks let by the US Fed, corporate earnings dynamics and various geopolitical risks.
Source: Bloomberg, Conseq
However in the very long-term horizon holds that global stock markets are rising strongly. The above mentioned fluctuating takes place around the long-term growth trend. That stems from the fact that global nominal GDP rises constantly despite some short-term fluctuations. Thanks to that revenues of publicly quoted companies grow. Profit margins fluctuate as well during the business cycle however this fluctuating takes place around the long-term trend or average. That is why corporate profits grow all the time in the long-term horizon. And it is just the corporate profits that drive global stock markets constantly up in the long-term horizon. Valuations like P/E fluctuates as well all the time nevertheless this takes place again around the long-term average. The result is that global stock markets grow strongly in the very long-term horizon. It can be seen on the chart below that depicts performance of the global stock markets in 20year rolling periods. We can see that if a dynamic investor has indeed a very long-term investment horizon, equities are practically risk-free. For example in the last 20year period ending in the year 2019 stocks rose by 141 %. We shall however add that this is a raw performance without deduction management fees for the management of investment funds. Nevertheless the performance is very high in any case and that is why a portfolio of an investor with a very long investment horizon should contain largely equities.
Investment Strategist Conseq Investment Management, a.s.