Here’s a question to ponder: are we heading for a 15-year bull market?
Because, as you may have seen in the press, a growing number of market analysts and fund managers reckon that the answer is ‘yes’.
Now, to some people, a bull market is just what we’ve been experiencing for the past five years.
On 3 March 2009, in the depths of the worst recession for 60 years, the FTSE 100 (FTSEINDICES: ^FTSE) closed at 3,512 – roughly half the level of 6,800 we’ve seen recently. And if share prices almost doubling aren’t a bull market, then I don’t know what is.
Yo-Yo markets
Take a longer view of the market, though, and the realisation dawns that we’ve been here before.
Having closed at a heady 6,930 on 30 December 1999, the market slumped to 3,287 by 12 March 2003, thanks to the dotcom crash, the Gulf War and recession.
Lo and behold, it then rose to close at 6,732 on 15 June 2007 – to then fall back to 3,512 in March 2009, thanks to the financial crisis and the ensuing recession.
And you don’t have to be a financial Einstein to see a pattern in those numbers. Up to a level that’s close to 7,000 or so; then slump by half; and then – magically – back up to that level of 7,000 or so.
So, put another way, the market has gone precisely nowhere since 1999: indeed, at around 6,800, we’re still below the level of 6,930 that the market reached on 30 December 1999.
Good times, bad times
Now, as I’ve written before on Fool.co.uk, such cyclicality does seem to be a feature of stock markets. Stock market historian David Schwartz, for instance, has pointed out 15-year bull and bear cycles going back to the 1850s.
And over in the United States – again, as I’ve written before – super-investor Warren Buffett, one of the world’s very richest individuals, has pointed to the evidence supporting 17-year cycles.
A Buffett speech in July 1999, for instance, was eventually converted into an article in Fortune magazine, in which Buffett pointed out that we’d just had 17 or so good years, and that the market was poised for 17 or so leaner years.
As Buffett pointed out in a subsequent Fortune article in 2002, he hadn’t known in 1999 that the market was going to crash, but he still stood by his view that returns would be lacklustre over the next 15 or so years. As indeed, they have been.
Which, give or take a year, brings us to the present.
It’s not just about share prices
Now, to some people, all this talk of cycles is an argument for not investing in shares in the first place. For if the market is going up only to subsequently go down, why bother?
The trouble is, that view is flatly wrong.
For while the market might be cyclical, the returns from the market are anything but.
In other words, don’t just look at share prices, but look as well at the dividends earned from owning those shares – and better still, at how reinvesting those dividends to buy more shares, has earned even more dividends.
Viewed on that basis, how have stock-market investments fared? In other words, if you’d bought just once – at the market’s 1999 peak – where would you stand today?
Handily, the FTSE’s Total Returns index series will answer precisely this question. So let’s take a look.
Real returns
Back in December 1999, the FTSE 100’s Total Return index stood at 3,141. Now it stands at about 5,040.
So while the market viewed just in terms of share prices has gone down by 1.6% since the end of 1999, actual total returns are an altogether more satisfactory 60%. That’s right, 60%.
A decent chunk of which, I’ll add, has been delivered during a time when the Bank of England’s Base Rate has been stuck at a historic low of 0.5%, rewarding bank account savers with negative real returns.
The moral? Shares are indeed a long-term investment, delivering returns not just from rising share prices, but from dividends and dividend reinvestment.
FTSE 14,000?
Now let’s return to those 15-year stock-market cycles.
Will the next year or so see the start of a 15-year bull market? I’ve no idea, and neither does anyone else. A FTSE of 8,000 by year end? I haven’t a clue.
But what I do know is that in terms of an overall P/E ratio, a market trading at just under 14 is by no means highly rated, and that there’s certainly plenty of headroom for share prices to go higher. Approximately twice as high – to FTSE 14,000 – if they reach 1999’s peak P/E.
Which means that – if the bull market viewpoint is correct – the next few months might be your last chance to buy shares as cheaply as you can today.
Which is a sobering thought.
