Think the stock market boom is too ‘extreme’? Think again

ARE stocks “overbought”?

Wrong-headed bears seemingly think so, claiming US and world stocks’ big year-to-date returns through Nov 25 – and Singapore stocks more than quadrupling long-term annualised averages – signal stocks partied too hard in 2024.

Hence, many argue, a horrid 2025 hangover must loom. Wrong!

Big upside doesn’t “cap” future gains. Markets actually hit extremes regularly – rendering 2024’s strength shockingly common. Let me explain.

Through Nov 25, the MSCI Singapore Index is up 36 per cent. US stocks are up 27.1 per cent in US dollar terms while the UK’s FTSE All-Share delivered 10.7 per cent in sterling.

The MSCI Singapore has annualised 7.8 per cent since its 1969 inception. The FTSE and America’s S&P 500 annualise about 10 per cent each in local currencies since the 1920s. All top average returns now.

But “average” doesn’t imply “frequent”.

Stocks usually return far higher or lower. Averages blend volatile extremes – mostly big positives with fewer negatives.

So, averages aren’t normal; extremes are. Whatever stocks do now through 2025, good or bad, won’t be because of 2024 returns.

Stocks rise big far more often than they fall. Consider the FTSE All-Share for its long, accurate history: since 1924, it rose in 75 per cent of rolling 12-month periods in sterling.

Similarly, since 1925, America’s S&P 500 rose in 75 per cent of these periods in USD.

Less history and diversity means the MSCI Singapore rose less often since its 1969 birth. But it still climbed in 61 per cent of rolling 12-month spans. Sounds great!

Yet returns vary. To see that, bracket calendar year returns into ranges: over 20 per cent, 0 to 20 per cent gains, 0 to -20 per cent declines and -20 per cent or worse.

Since 1924, the FTSE topped 20 per cent returns in 29 of 99 years and returned 0 to 20 per cent 43 times. It fell 0 to -20 per cent only 22 times. Five years trailed -20 per cent. It beat its long-term average in 55 years – more than half the time.

US stocks topped 20 per cent in 37 of 98 years – the most frequent result. Some 35 years featured 0 to 20 per cent gains. Only 20 had 0 to -20 per cent drops. Just six saw returns worse than -20 per cent.

The MSCI Singapore echoes this. Since 1969, it topped 20 per cent in 18 of 54 years – the most frequent result, like US stocks. Some 15 years delivered 0 to 20 per cent gains. The index fell 0 to -20 per cent 15 times and trailed -20 per cent for just six years.

Hence, from Sengkang to Sheffield or Seattle, you celebrate above-average, even huge years – like 2024 – more often than down years.

Average isn’t common

Average returns are rare. In local currencies, the S&P 500 returned 5 to 15 per cent in only 17 per cent of years and the FTSE did so in 22 per cent of years. The MSCI Singapore did so in just 13 per cent of years since 1969.

Seen another way: Singapore stocks returned just one spot-on average year – in 2021. The 8.2 per cent return in 2014 and 1992’s 7.6 per cent were the only others that were even close.

Recently, many fixated on Singapore stocks’ 2020 and 2022 negativity. Fine! But what of 2017’s 25.5 per cent boom? Or 2012’s 23.4 per cent? Or 2009’s massive 70 per cent? All were extreme.

You may recall even wilder booms – and painful declines – amid Singapore’s 1970s economic growing pains.

In America, three of the last five years – 2019, 2021 and 2023 – topped 20 per cent in USD. Only 2022 was negative, like Singapore.

Bizarrely, 2020 was actually the closest to “average” – but would you call 2020 “normal”?

The FTSE wobbled more but topped its long-term average in two of the last five years, despite pandemic-era dislocations.

Whether it is a bull or bear market hugely influences returns you should normally expect. Sounds obvious! Yet few weigh that.

Consider: Stocks’ long-term averages include bear markets. America’s S&P 500 bull markets before the present annualised 23 per cent in USD. The 27.1 per cent result in USD in 2024, so far, is right around that average.

Bull markets’ seemingly “extreme” positives underpin the “average” returns that bears cite.

That isn’t to say 2025 is a surefire winner. I don’t see a bear market forming now, but unpriced risks could lurk later.

My 2025 forecast, coming soon here, will address that. But 2024’s big returns aren’t among those risks. And the backdrop has plenty of positives, too.

Regardless, when you realise robust gains aren’t abnormal, you see “too far, too fast” fears are faulty. Tune them out – 2024’s terrifically typical climb is nothing to fear.

The writer is the founder, executive chairman and co-chief investment officer of Fisher Investments, an independent investment adviser serving both individual and institutional investors globally