The exceptional rise of U.S. equity markets over the past year has been difficult for many institutional investors to watch because their long-term focus meant they couldn’t fully participate in it. But the rally truly was exceptional and there are indications it may not last.

As the S&P 500 Index approached the one-year anniversary of its low on March 23, 2020, Robert Almeida, portfolio manager and global investment strategist at MFS, was musing with a fellow portfolio manager about how long the recent outperformance of cyclicals would continue and how rare a trailing one-year return approaching 80 per cent actually was.

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“He said, ‘I bet you that has only happened a couple of times.’ I said, ‘No, there’s no way. I bet you it’s a lot,’” says Almeida, who set out to find the answer by pulling his own firm’s data back to the 1920s and then reaching out to a colleague at Bernstein Research to get trailing 12-month returns for every month-end dating back to 1882.

It turned out a greater than 75 per cent return (the S&P 500 Index turned in 77 per cent in the year ending March 23, 2021) has happened only five times in 139 years. Not coincidentally, the other four times occurred in the 1930s during the Great Depression when, similar to 2020–21, the U.S. government provided massive support to prop up the economy.

In a report Almedia wrote based on these findings, he noted that, in the 1930s, the outlier returns weren’t sustainable and the business cycle that followed was strong but short-lived. By 1937, when the impact of early stimulus provided through the New Deal was fading, deficits became top of mind, spending was curtailed and the economy experienced a contraction.

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Institutional investors that have resisted the lure of cyclicals “are probably unhappy with their underperformance,” Almeida says. But, he emphasizes, it’s critical to stay focused on the long term, because doing anything else can be extremely risky.

“Our industry is plagued by storytelling and investment chasing and that sometimes comes in a stock or a theme — [for example,] tulips in the 1600s, the South Sea Company in the 1830s and technology in the late 1990s. It also comes in the form of vehicles — so, closed-end funds in the early 1990s, separate account vehicles for retail [investors] in the early 2000s . . . and portfolio insurance in the 1980s,” he says. “Sometimes [things] end okay. More often than not, they don’t.”

Almeida’s report predicted, “Cyclicals will have had their day, as they often do in the early phases of a market cycle, but we believe secular trends will win out in the long run, rewarding patient investors as the cycle matures.”