As we discussed in our year-end review, despite all the complaints and panicked rhetoric, it wasn't so much 2018 that was painfully volatile year - it is 2017 that was an unprecedented case study in market calm; a year when the MSCI World index experienced just three days of market moves of 1% or more in either direction.
And, as SocGen's Andrew Lapthorne writes this morning, "it was this unusually low volatility in 2017 that helped contribute to the market difficulties in 2018" as traders tried - and failed - to shift from a placid market to one that increasingly reflected the risks of the day.
The SocGen strategist then lays out some facts about market performance last year, noting that overall the MSCI World finished the year down 10.4% with a negative total return of 8.2%, beginning its slide almost at the beginning of the year, with Emerging Markets fell 16.6% with a total return of -14.2%, with most equity markets losing similar amounts. The exception, according to Lapthorne was the US, "which ended the year in dramatic fashion", with the S&P 500 having its worst December (-9.2%) since its inception in 1957 despite a massive 5% daily surge on the 26th December. To be sure, while the S&P finished the year down just 6.2% and the Nasdaq ended down just 3.9%, it could have been far worse.
Meanwhile, as we showed yesterday, outside the US it was mostly a very ugly year, with double-digit losses were common and several indices including Germany and Japan are in bear market territory (the two outliers were, curiously, the UAE and Saudi Arabia).
Taking an even bigger step back, and looking at an interval of two decades, Lapthorne writes that some index returns are "downright embarrassing:"
MSCI Eurozone for example first passed its current price level in July 1998! For many equity investors compounding dividends has been their only return over the last 10 and 20 years!
Which brings us to the core question of Lapthorne's note today: where does the market stand today, to which he has an ominous response: "despite all the despairing headlines and disappointing returns seen last year, it looks like we are only at the beginning of the sell-off."
And just to make sure SocGen clients are even more depressed, Lapthorne reminds us that while the investing public is fixated on prices being down 20% or more, "during a proper bear market it is common to see one third of stocks lose 50% or more."
Finally, the SocGen strategist shows the chart below which reveals the interesting observation that while the US equity market has done well on a headline basis, "the number of stocks down 50% or more in the S&P 500 is on a par with MSCI Europe at 9% and when we go lower down the market cap scale into the S&P 1500, 18% are down 50% or more from their three year highs."
In other words, if this is indeed a bear market - and Dennis Gartman swore this morning that it is - expect overall stock prices to get worse before they get much worse.