Investors are constantly told to take a long-term view when looking at their portfolios but in some cases just five years can be used as a ‘long term’ time frame. 
However, Bank of America Merrill Lynch’s (BofA ML) annual ‘The Longest Pictures’ report aims to analyse financial markets over a multi-decade or even multi-century view to show how various assets have performed over the truly long term.
In the following gallery, FE Trustnet highlights seven of the most interesting equity market charts from the report, along with insights from BofA ML’s analysts. While the general themes in a couple of charts might be familiar – such as value’s history of outperforming growth stocks – seeing them in graphic form and over the very long term can be startling.
In coming weeks, we’ll also be taking a closer look at the fixed income, macro and risk charts that long-term investors should see.
US versus UK since 1950
Source: BofA ML, Global Financial Data, Bloomberg
The US stock market has been the major beneficiary of the rally in risk assets that followed the financial crisis but the above chart shows how much UK equities have lagged it over the recent past.
The outperformance of US equities over the UK is currently at its highest level since 1976 – when a financial crisis forced the UK government to apply for a $4bn loan from the International Monetary Fund.
Of course, sentiment towards the UK has been hampered more recently by the looming remain/leave referendum on its membership of the European Union. With this taking place on Thursday, domestic investors will be hoping that a definite result either way will take some of the pressure off the UK stock market.
Value versus growth since 1926
Source: BofA ML, Fama-French
BofA ML says this is a “very important” chart. Over the past century, the value style of investing has outperformed growth but has struggle more recently – as FE Trustnet has highlighted on a number of occasions.
Value has beaten growth in about three of every five years over this period; the average annual price return of value stocks has been 17 per cent since 1926 while for growth stocks it has been just 12.8 per cent.
“Periods of economic expansion tend to favour value stocks. Growth tends to outperform during periods of depression, recession and below-trend growth. Note the marked outperformance of growth in the 1930s,” the bank’s analysts said.
“The outperformance of growth versus value in the past seven years during a US equity bull market is an important historical anomaly to note. The inability of value stocks to enter a new relative bill market in recent years is a testament to current highly deflationary expansion in the global economy.”
Always buy “humiliation”
Source: BofA ML, Ibbotson, Bloomberg, Datastream
On 28 April 2016, the US stock market entered its second longest bull market in history and are now trading at a record high to the rest of the world.
The chart above shows the 10-year rolling return of US stocks. In February 2009, the global financial crisis caused this to fall to its lowest level since August 1939 – the period covered by the Great Depression.
BofA ML says this chart can serve as “a good reminder that investors should always buy ‘humiliation’”.
The 75-year low in bank stock relative performance
Source: BofA ML, Bloomberg, Global Financial Data
Following their strong outperformance between the 1940s and 1980, banks performed poorly relative to wider equity markets and the global financial crisis prompted a further decline.
Since the 1980s, banks have been hit by periodic debt crisis (including Latin American in 80s and Asia and Russia in the late 90s) but the record low of relative performance was reached in February 2009. Banks’ relative performance is still at a close to 75-year low today.
BofA ML says the above chart could easily be mistaken for one showing interest rates and indicates that the world is stuck in a minimum growth, minimum rate backdrop.
Emerging market equities since 1920
Source: BofA ML, Global Financial Data, Bloomberg
Emerging market stocks have struggled to make much ground over recent years (owing to numerous concerns, including weakening Chinese growth, falling commodity prices and potential interest rate rises in the US) and are now trading 40 per cent below their October 2007 peak.
However, the chart shows how strong the run in emerging markets had been since the 1960s; over that period, the asset class has risen by about 56 times over.
“The great bull market in emerging market equities began as the Bretton Woods system and the gold peg started to unravel in the late-1960s,” BofA ML said.
“In contrast to developed markets, emerging market equities trended decisively higher in the 2001-10 decade thanks to China’s accession to the World Trade Organization, a weak dollar and a commodity boom.”
US equities since 1871 in real terms
Source: BofA ML, Robert Shiller, Ibbotson
BofA ML says adjusting US stock prices for inflation gives a “more nuanced” picture of long-term equity returns.
According to the bank’s analysis, the S&P 500 has given a negative real price return in almost one out of every two years since 1871.
It also points out that the US stock market took 20 to 30 years to reach new highs following its secular top in 1907, 1929 and 1968; today, US stocks in real terms are just 0.5 per cent from their all-time high.
Global stock market cap since 1940
Source: BofA ML, Global Financial Data
The capitalisation of the world stock market currently stands at $66.6trn (or £45.5trn). This is 5 per cent off its all-time high of $70.1trn, a record that was set in May 2015.
World stock market capitalisation now stands at 90 per cent of global GDP. This is up from its low of 54 per cent in 2008 but below the two prior highs of 109 per cent in 1999 and 111 per cent in 2007.