Dotcom Delirium Of The '80s: Lessons Learned About Bull Markets

by: Invesco US

Summary

Short-term volatility may bring opportunities for investors who are prepared with a “stra-tactical” approach.

During the secular bull market from 1982 through 1999, bonds underperformed stocks overall, but during certain years, investors could have benefited from a strategic bond allocation.

True diversification requires maintaining a strategic allocation of assets that have historically performed differently in various economic environments.

Part 2: How a 'stra-tactical' approach can help investors stay ready for change

By Tracy Fielder, Rethinking Risk strategist

This series uses historical economic snapshots to explore how a "stra-tactical" investment approach that combines strategic and tactical allocations can help investors manage volatility. This blog examines the bull equity markets of the 1980s and 1990s. The first blog looked at the bond-unfriendly period during the 1950s and early 1960s, and the final blog will looks at flows into equity and fixed income markets since the Great Recession.

Short-term volatility may bring opportunities for investors who are prepared. But it's very difficult to consistently capitalize on opportunity with a timing strategy that moves all-in and all-out of major asset classes. For example, there's no way investors could have timed the markets of the 1980s and 1990s with any type of precision. That's why I believe investors should consider a stra-tactical investment approach.

Dotcom drives bull market

The period between 1982 and 1999 was an era when stocks outperformed bonds. This time period included several instances when the Federal Reserve (Fed) hiked short-term rates and roiled bond markets:

  • During 1994, the bond market experienced its worst historical loss.1 When the Fed began nudging short-term interest rates higher in early February, the bond market started inflicting heavy damage on financial companies, hedge funds and bond mutual funds.
  • The Fed raised rates again in 1997 to stifle growing inflation, based on wage pressure fears.
  • In 1999, the Fed raised rates six times to try to stifle the inflationary effect of the "dotcom bubble" - the rise in equity markets fueled by Internet-based company investments.

Overall, from 1982 through 1999, stocks gained 18.52%, long-term government bonds returned 12.08%, and corporate bonds returned 12.17%, as the chart below shows. But despite the fact that bonds generally underperformed stocks, investors still could have benefited from maintaining a strategic bond allocation in certain years, shown below, when bonds significantly outperformed stocks during this secular bull market.

Bonds vs bulls: Even in a bull market, bonds had their day

Bonds vs bulls: Even in a bull market, bonds had their day

Sources: Ibbotson; Bloomberg L.P., Invesco (commodities). Stocks are represented by the S&P 500 Index; inflation by the Consumer Price Index; commodities by the S&P GSCI Index; long-term government bonds by the Ibbotson U.S. Long-Term Government Bond Index; T-bills by the Ibbotson U.S. 30-Day T-Bill Index; and corporate bonds by the Ibbotson U.S. Long-Term Corporate Bond Index. Past performance is no indication of future results. An investment cannot be made into an index.

What about commodities?

Commodities are usually considered a hedge against inflation, yet there were years in which they performed well during this secular era of low-inflation growth, as the graphic below shows. It's noteworthy that in 1990, a rare year during this broader time period when stocks posted negative returns, commodities returned more than 29%.

Commodities outperformed during certain years of low inflation

Commodities outperformed during certain years of low inflation

Sources: Ibbotson; Bloomberg L.P., Invesco (commodities). Stocks are represented by the S&P 500 Index; inflation by the Consumer Price Index; commodities by the S&P GSCI Index; long-term government bonds by the Ibbotson U.S. Long-Term Government Bond Index; T-bills by the Ibbotson U.S. 30-Day T-Bill Index; and corporate bonds by the Ibbotson U.S. Long-Term Corporate Bond Index. Past performance is no indication of future results. An investment cannot be made into an index.

Be prepared

What do these bull market lessons mean for investors in 2016? To have true diversification in a portfolio, I believe an investor should always maintain a strategic allocation of assets that have historically performed differently in various economic environments to avoid having one asset class dominate the outcome of the portfolio. To pursue opportunity, investors should consider tactical adjustments that refine - rather than reject - their strategic plan, in my view. This type of stra-tactical framework may help increase investors' ability to reach their financial goals in a variety of market or economic environments, including rising rate or low inflation environments.

The dual point of staying stra-tactical is to:

  • Always be prepared for a variety of market environments
  • Be simultaneously aware of current market conditions and tactically adjust your portfolio accordingly.

When you look at the overall performance figures from 1982 through 1999, investors more than likely would have wanted to be all-in on stocks, but they would have missed short-term opportunities by ignoring other asset classes. Not even the most adept market observers know when secular environments will come and how long they'll last, nor do they know when counter-cyclical moves will disrupt long-term performance patterns. That's why it's important for investors to be prepared.

Sources

  1. Fortune, "The great bond massacre," Al Ehrbar, Feb. 3, 2013. Returns based on Barclays US Aggregate Bond Index and the 10-Year US Treasury Index.

Important information

Commodities may subject an investor to greater volatility than traditional securities such as stocks and bonds.

Fixed income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer's credit rating.

In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.

Although bonds generally present less short-term risk and volatility than stocks, the bond market is volatile and investing in bond funds involves interest rate risk; as interest rates rise, bond prices usually fall, and vice versa. Bond funds also entail issuer and counterparty credit risk, and the risk of default. Additionally, bond funds generally involve greater inflation risk than stocks.

An investment cannot be made directly in an index.

Past performance is not a guarantee of comparable future results.

Diversification does not guarantee a profit or eliminate the risk of loss.

The Barclays US Aggregate Bond Index is an unmanaged index considered representative of the US investment-grade, fixed-rate bond market.

The S&P 500® Index is an unmanaged index considered representative of the US stock market.

The consumer price index (NYSEARCA:CPI) measures change in consumer prices as determined by the US Bureau of Labor Statistics.

The S&P GSCI Index is an unmanaged world production-weighted index composed of the principal physical commodities that are the subject of active, liquid futures markets.

The Ibbotson US Long-Term Government Bond Index is an unmanaged index representative of long-term US government bonds.

The Ibbotson US 30-Day T-Bill Index is an unmanaged index representative of 30-day Treasury bills.

The Ibbotson US Long-Term Corporate Bond Index is an unmanaged index representative of long-term US corporate bonds.

The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
Click to enlarge

All data provided by Invesco unless otherwise noted.

Invesco Distributors, Inc. is the US distributor for Invesco Ltd.'s retail products and collective trust funds. Invesco Advisers, Inc. and other affiliated investment advisers mentioned provide investment advisory services and do not sell securities. Invesco Unit Investment Trusts are distributed by the sponsor, Invesco Capital Markets, Inc., and broker-dealers including Invesco Distributors, Inc. PowerShares® is a registered trademark of Invesco PowerShares Capital Management LLC (Invesco PowerShares). Each entity is an indirect, wholly owned subsidiary of Invesco Ltd.

©2016 Invesco Ltd. All rights reserved.

Dotcom delirium of the '80s: Lessons learned about bull markets by Invesco Blog