The impact of government and central bank interventions clearly affected the performance of several sectors.
“The primacy of monetary policy in particular in response to the crisis and the recovery has been historic,” says Stephen Wood, chief market strategist at Russell Investments. “It would be difficult to argue that any other factor has been as impactful as the policies of the Federal Reserve.”
For example, if returns between January 1, 2007, and December 31, 2016, were considered, consumer staples would become one of the best-performing sectors in the economy because of their remarkable run during the financial crisis as more investors sought defensive investments. If returns between March 9, 2009, and November 2016 were considered, the financial sector would appear among the worst performers, as it was buoyed by two recent interest-rate hikes and expectations for tax and regulatory reform.
Certain styles have also outperformed the vanilla benchmark indexes over the past eight years. Small and mid-cap stocks, for instance, have outperformed since the financial crisis.
Geography has made a difference as well, with emerging markets outperforming the U.S. and other developed markets, says Aguilar, but it’s difficult to determine where the U.S. is in the business cycle—and the chances for a market top and downturn—when you look at equity performance alone.
“Right now, the equity market is clearly hoping that the new presidential administration will provide infrastructure spending, tax reform and deregulation,” says Aguilar. “The market believes this and it is pricing in the expectation, but the data itself shows that the economy is not nearly as strong as people may think, and it’s hard to support current market valuations when you see the economic data.”
While it’s possible the remarkable bull run will continue, inflated valuations may cap potential returns across the short- and mid-term, says Lafferty.
“It isn’t statistically possible to get the multiple expansion we’ve had over the last eight years to continue,” says Lafferty. “While earnings are up dramatically, price-earning multiples are up just as dramatically. The price of the S&P 500 since the bottom has increased by almost 17 percent on an annualized basis. That won’t continue. We think the return on equity will be positive, but it won’t be very much.”
According to Lafferty, the S&P 500 currently trades at an 18x price-to-forward-earnings ratio—while company earnings will likely be positive, they’re not going to drive equity gains moving forward.
The better bet for equity investors and their advisors, according to Wood, is to concentrate on diversification rather than attempting to select winners and losers themselves.
“A broadly diversified, multi-asset strategy is for almost all investors a responsible starting point,” Wood says. “A disciplined, well-researched security selection married to a diverse set of asset classes is what we think is most helpful for investors over the long term.”
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