Bigger pictures

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  By Guest Blogger Doug Rowat

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What’s it all worth?

I mean all the assets in the world—the whole enchilada. Cash, bonds, equities, life insurance, pensions, real estate, consumer durables, metals and so on.

According to the Boston Consulting Group (BCG) and its annual global wealth report, which has been going strong now for 21 years, total global wealth stands at US$431 trillion with financial assets (bonds, equities, etc.) accounting for US$250 trillion of that total.

The financial asset piece of the pie, which is already significant, is likely to grow in prominence. Developed countries, of course, have a larger concentration of their wealth in financial assets due to tradition, better accessibility and higher levels of trust. Growth regions meanwhile often perceive financial markets less favourably, have less understanding of them, or simply lack the access. However, according to BCG, this will change:

Over the next five years, however, a combination of greater financial inclusion and growing capital market sophistication will change the wealth composition in growth markets…. In particular, investment funds will become the fastest-growing financial asset class, with a projected CAGR of 11.6% through 2025. This spike comes as more individuals embrace viable alternatives to investments in traditional real assets.

The BCG report was released before the Evergrande crisis, but you can’t help but think that Evergrande’s current problems dovetail with BCG’s broader forecast. If there’s any silver lining to be had from the Evergrande crisis this might be it: due to newfound perceptions of risk, the crisis may spark a trend in emerging markets away from owning real assets (e.g., real estate) towards owning financial investments.

But regardless of its composition, BCG expects overall global wealth to reach US$544 trillion or—and here’s a new word for some—more than half a quadrillion dollars by 2025. For those keeping score, a quadrillion is a 1 followed by 15 zeros. (And to venture a bit further down the rabbit hole, a googol, which is the naming inspiration of the world’s most famous search engine, is a 1 followed by 100 zeros. Google (ironically) tells me that a googol is a number so large that all the atoms in the universe don’t equal it.)

But I digress, back to half a quadrillion. It’s still an enormous number and keep it in mind when you consider the US$25 trillion or so in stimulus that’s been injected into the global economy thus far during Covid. A massive number, yes, but a relatively small number in the grand scheme of global wealth.

Consider also that 10 years ago the BCG report indicated that global wealth sat at only US$122 trillion. So, through a myriad of market worries over the past decade—falling oil prices, rising oil prices, a Greece debt crisis, a European sovereign debt crisis, a US fiscal cliff, a Fed taper tantrum, a China economic slowdown, Brexit, Trump, a China/US trade war, a global pandemic, lofty tech-sector valuations, US election fears and a US Capitol riot—global wealth still found a way to expand enormously. It always does.

But let’s narrow our focus and look only at equity markets, namely the S&P 500, which has a more digestible total market capitalization of ‘only’ US$39 trillion.

Investors have become concerned recently by Evergrande, the rise of the Delta variant and the discontinuation of government and central bank stimulus. As a result, we’ve had our first 5% pullback for the S&P 500 this year. Compound Capital Advisors has crunched the numbers and offered some perspective on 5% intra-year pullbacks. Unsurprisingly, they’re incredibly common and a completely normal part of equity market volatility. Rarely are such pullbacks a harbinger of worse to come. In fact, since 1928, a 5% pullback has happened virtually every year.

To be precise, 5% intra-year pullbacks occur 94% of the time in any given year, or on average once every 1.1 years. Even 10% intra-year pullbacks are common, occurring 63% of the time, or on average once every 1.6 years. So concluding that a mild pullback alone is ‘proof’ of a bear market to come is almost certainly an incorrect assumption. Incidentally, the chances of a financial crisis–type bear market occurring in any given year are only 2%.

Further, consider the current bull market’s place in history. In terms of returns and duration, the current bull market is likely only in its infancy. Historically speaking, it’s just getting started:

S&P 500 historical bull markets – return plotted against duration

Source: Wells Fargo, S&P 500 data from 1932-2021

So, calling for a bear market now may be accurate, but it’s more likely just alarmist. And the more appropriate question to ask is not whether your reasons for expecting a bear market are valid, but rather, do you frequently (or always?) call for a bear market at the first signs of market trouble? If you do, your forecasting track-record is abysmal.

So, before presenting your bear-market thesis in the comments—and I can hear many of you hammering at your keyboards already—examine your own track-record.

Be honest: does it suck?

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.