You may have heard comments like, “markets don’t go up in a straight line” or “ markets go up like an escalator, but down like a lift”. We know that some years offer better performance than others, and indeed, some years give us negative returns, but what is interesting is that over decades, markets have spent almost half their time in extended sideways regimes! Powerful multi-year bull markets are separated by long, frustrating sideways periods that feel like lost years, or even lost decades. These sideways stretches are when valuations compress, excesses get worked out, and fundamentals catch up.
Using the US markets to illustrate this, from 1966 to 1982 the Dow Jones flirted with 1,000 for more than a decade. Inflation surged, valuations collapsed, and real returns were deeply negative. And yet earnings grew steadily through the 1970s – what didn’t grow were valuations. By 1982, the groundwork was laid for one of the strongest and longest bull markets in history (1982 to 2000).
From 2000 to 2013, the S&P 500 produced roughly 0% total return over 13 years (from peak to peak). Two major crashes bookended the period – the dot.com collapse in 1999 and the Global Financial Crisis in 2009. But again, under the surface, earnings grew, balance sheets healed, and new leaders emerged (e.g. Amazon and Google). When valuations finally reset, markets launched into the current historical bull cycle.
The Japanese market from 1990 to early 2024 is perhaps the “textbook” example of how demographic stagnation and debt overhang can freeze an entire market. Yet even in Japan, dividends were paid, companies restructured, and corporate governance improved. Opportunities to invest in good companies were available to those that found them.
Why do Sideways Markets happen?
Sideways markets aren’t random, and almost always follow a recognisable pattern.
- Valuations are excessive, leading to prices that don’t reflect the fundamentals of the underlying companies, and the market needs time to catch up.
- Inflation increases, not necessarily to extreme levels, but just persistent inflation can erode real returns.
- Economic or structural adjustments like demographic changes, debt cycles, and policy shifts can all cap growth for a while.
Sideways markets don’t need to be stagnant markets, and the lost decade doesn’t affect all companies. Dividends are still paid, and if reinvested, can compound nicely over a period of stagnation. Value investors thrive in sideways markets where valuations and fundamentals become more important than growth momentum, and so active investors find opportunities, while the overall index level stays flat.
South Africa is no different from the rest of the world, and market cycles are almost more pronounced than the developed market peers. From 1981 to 1994, we lived in a period of political uncertainty and high inflation. Nominal prices rose, but real returns were poor. Under the surface, resource companies did relatively well as commodity prices surged, financials and industrials lagged due to sanctions and capital flight. Dividends made up most of the returns for patient investors.
Again, from 2015 to 2023, the South African market struggled under load shedding, near-zero GDP growth, policy uncertainty, and a shrinking JSE-listed universe. The ALSI delivered low single-digit real returns, the rand weakened significantly, and the offshore markets massively outperformed the local market.
Unlike the US, which tends to grow in long tech-driven cycles, South Africa is more structurally tied to commodity cycles, global liquidity, and the direction of the rand.
While South Africa is not out of the woods and still faces low domestic growth, fiscal constraints, and capital outflows, there are some positives that should provide some tailwinds to our local market. Loadshedding seems to be a thing of the past. We are seeing some reforms gaining momentum (think public-private partnerships), a global commodity cycle that may re-accelerate, and most importantly, historically low valuations. Even after a spectacular 2025, which was driven almost exclusively by precious metal prices, there are many companies and sectors that are historically cheap and run by strong management teams.
I am not sure we are at the end of the global bull market, but I think the signs are pointing towards caution in the investment environment. Passive investing (investing in indices) is dangerous at a time like this, and diversification and active management come to the fore. Valuations are important, and cash flow and dividends become ever more important. Sideways markets are where discipline compounds and impatience destroys. The biggest cost of sideways markets is psychological, not financial.
Possibly the most important thing to keep in mind is that global markets are cyclical, and while the AI super-cycle may be providing all sorts of unimaginable opportunities, the fundamentals matter. Nothing goes up forever, and even if they don’t come crashing down, they can go sideways for a long time!
Lost decades in the stock market
You may have heard comments like, “markets don’t go up in a straight line” or “ markets go up like an escalator, but down like a lift”. We know that some years offer better performance than others, and indeed, some years give us negative returns, but what is interesting is that over decades, markets have spent almost half their time in extended sideways regimes! Powerful multi-year bull markets are separated by long, frustrating sideways periods that feel like lost years, or even lost decades. These sideways stretches are when valuations compress, excesses get worked out, and fundamentals catch up.
Using the US markets to illustrate this, from 1966 to 1982 the Dow Jones flirted with 1,000 for more than a decade. Inflation surged, valuations collapsed, and real returns were deeply negative. And yet earnings grew steadily through the 1970s – what didn’t grow were valuations. By 1982, the groundwork was laid for one of the strongest and longest bull markets in history (1982 to 2000).
From 2000 to 2013, the S&P 500 produced roughly 0% total return over 13 years (from peak to peak). Two major crashes bookended the period – the dot.com collapse in 1999 and the Global Financial Crisis in 2009. But again, under the surface, earnings grew, balance sheets healed, and new leaders emerged (e.g. Amazon and Google). When valuations finally reset, markets launched into the current historical bull cycle.
The Japanese market from 1990 to early 2024 is perhaps the “textbook” example of how demographic stagnation and debt overhang can freeze an entire market. Yet even in Japan, dividends were paid, companies restructured, and corporate governance improved. Opportunities to invest in good companies were available to those that found them.
Why do Sideways Markets happen?
Sideways markets aren’t random, and almost always follow a recognisable pattern.
Sideways markets don’t need to be stagnant markets, and the lost decade doesn’t affect all companies. Dividends are still paid, and if reinvested, can compound nicely over a period of stagnation. Value investors thrive in sideways markets where valuations and fundamentals become more important than growth momentum, and so active investors find opportunities, while the overall index level stays flat.
South Africa is no different from the rest of the world, and market cycles are almost more pronounced than the developed market peers. From 1981 to 1994, we lived in a period of political uncertainty and high inflation. Nominal prices rose, but real returns were poor. Under the surface, resource companies did relatively well as commodity prices surged, financials and industrials lagged due to sanctions and capital flight. Dividends made up most of the returns for patient investors.
Again, from 2015 to 2023, the South African market struggled under load shedding, near-zero GDP growth, policy uncertainty, and a shrinking JSE-listed universe. The ALSI delivered low single-digit real returns, the rand weakened significantly, and the offshore markets massively outperformed the local market.
Unlike the US, which tends to grow in long tech-driven cycles, South Africa is more structurally tied to commodity cycles, global liquidity, and the direction of the rand.
While South Africa is not out of the woods and still faces low domestic growth, fiscal constraints, and capital outflows, there are some positives that should provide some tailwinds to our local market. Loadshedding seems to be a thing of the past. We are seeing some reforms gaining momentum (think public-private partnerships), a global commodity cycle that may re-accelerate, and most importantly, historically low valuations. Even after a spectacular 2025, which was driven almost exclusively by precious metal prices, there are many companies and sectors that are historically cheap and run by strong management teams.
I am not sure we are at the end of the global bull market, but I think the signs are pointing towards caution in the investment environment. Passive investing (investing in indices) is dangerous at a time like this, and diversification and active management come to the fore. Valuations are important, and cash flow and dividends become ever more important. Sideways markets are where discipline compounds and impatience destroys. The biggest cost of sideways markets is psychological, not financial.
Possibly the most important thing to keep in mind is that global markets are cyclical, and while the AI super-cycle may be providing all sorts of unimaginable opportunities, the fundamentals matter. Nothing goes up forever, and even if they don’t come crashing down, they can go sideways for a long time!
Asset Class Returns
The table below represents a rolling year view of the major asset class returns that we track. It offers a view of the asset classes we use to diversify your portfolio.