Despite Bear Market, S&P 500's Long-Term Returns Remain Above Average

Buy and hold is a long-term investment strategy based on buying shares in stable, dividend-paying companies and holding them indefinitely. Of course, shares are sold from time to time.

As it turns out, the 2022 bear market did little to hurt long-term bulls, as the 10-year return on the S&P 500 remains above average for the fifth year in a row.

The annualized return of the S&P 500 over the past 10 years was +11.7%. Though down from +16% a year earlier, the increase remained above the +10.6% average for each decade since 1927.

U.S. Money Supply Drops for the First Time in 63 Years

2022 was the first year in the last 63 in which the money supply fell — by 1.3%, to be precise.

This is significant because from 1959 to 2021, the U.S. money supply grew every year without exception. The largest increases were in 2020 (25%), and in the 1970s, there were four years with an increase of 13% each. The smallest increases were in 1994 (0.3%) and 1993 (1%).

Money Supply, also known as M2, refers to the amount of money in circulation in an economy, both in the form of cash (banknotes and coins) held by individuals and in the form of deposits (credit transfers, promissory notes, cheques, etc.).

Central banks are responsible for keeping the money supply at an acceptable level. As a simple example, suppose that a country's central bank decides to increase the money supply by minting more coins.

As a consequence, the currency would depreciate. Because when you increase the supply of something, it loses value.

A Historical Gap of Value Stocks Vs. Growth Stocks

Growth stocks underperformed value stocks in 2022 with a spread of 21.6%, the second largest historical gap. Only in 2000 did we see a larger gap (29.6%) which was the start of a 6-year streak of value outperforming growth from 2001 to 2006.

If you are not familiar with value and growth stocks, here is a summary:

1) Value stocks: Investing in this type of stock is based on buying undervalued stocks based on their fundamentals and waiting for the market to eventually price them fairly in the medium and long term.

Therefore, this value philosophy is about analyzing companies in depth, determining their intrinsic value, and checking that it matches their market price to see if they are trading at a discount and have significant upside.

Value sectors tend to be electricity, concessions, motorways, and food and are characterized by a minimum payout ratio of 40% (the percentage of profits that a company distributes to its shareholders in the form of dividends).

2) Growth stocks: Investment is based on buying stocks of companies that are expected to grow strongly in the future. These companies don't pay dividends as they reinvest their profits.

Investor Sentiment (AAII)

Bullish sentiment, or expectations that stock prices will rise over the next six months, fell 2.6 percentage points to 28.4%. It remains below its historical average of 37.5% for the 56th consecutive week.

Bearish sentiment, or expectations that stock prices will fall over the next six months, rose 3.6 points to 36.7%. This is the first time since August 2022 that pessimism has been below 40% for three consecutive weeks. It remains above its historical average of 31%.

Global Stock Market Rankings

Returns of the main European, U.S., and Chinese stock exchanges so far in 2023 are as follows:

1. Shanghai Shenzhen CSI 300 +8.52%.
2. Italian FTSE MIB +11.21%.
3. Nasdaq 100 +11.21%.
4. Euro Stoxx 50 +8.85%.
5. IBEX 35 35 +9.76%.
6. CAC 40 +8.72%.
7. German Dax +7.81%.
8. S&P 500 +6.02%.
9. Japanese Nikkei +5.13%
10. British FTSE 100 +4.06%.
11. Dow Jones Industrial Average +2.5%.

Disclosure: The author doesn't own any of the securities mentioned.