It really pays to have been in the right equity sectors over the last 25 years. Plus a deep dive into 2121 volatility for different asset classes. Oh and why Lithium is still a great bet.

Last week I mentioned that S&P Dow Jones a few weeks back produced their annual data dump on long term returns from investing in US equities. Let’s take a deeper look this week at what the numbers tell us. We’ll start with the first table below which looks at returns over the 31 years to Dec 2021 for key sectors listed on the US market.

I’d make a number of observations. First that annualised return for the S&P 500 is impressive at 10.76% per annum. Compound that out over many decades and the return is a staggering 2532 % in total return terms over 31 years.

I also think the contribution to those total returns by dividends is also fascinating. We’re told that the US market is one predominantly driven by multiples increase i.e an increase in the price to earnings ratio. And that is largely true but note that the annualised return for the index increased by 27% when factoring back in dividends while the return increased from 1248% on a share price basis to a total return of 2532% on a total (inc dividends) return basis.

And that impact from dividends is even more pronounced on a sectoral basis. Utilities, energy and communication services sectors returned annualised 4%, 4.89% and 3.13% per annum in share price terms but total returns were 8.59%, 8% and 6.95% respectively i.e dividends increased returns by between 63% (energy) and 122% (comms services). By contrast Its total return was increased by only 8.93%.

Next up I’d observe that as you’d expect the IT sector produced the biggest gains, with annualised returns of 13.94% (TR) closely followed by healthcare (12.3% pa) and consumer discretionary (11.83% pa). Comms services produced the weakest returns of just under 7% per annum – though that in itself wasn’t a terrible return !

S&P Long term numbers by sector since 1990

The next table below, also from S&P Dow Jones, looks at long term returns (upto 25 years) through a different lens – size. Let’s start with the 25 year mark and note that both mid cap and small cap stocks produced a bigger total return compared to large caps (the S&P 500) 11.65% (mid caps) & 10.72% (small caps) vs 9.76%. BUT once we switch to the last five years, that story changes. At the five year mark (2016 to 2021), large caps in the S&P 500 outperform with an annualised return of 18.47% vs 13% for mid caps and 12.42% for small caps. I’d also make the obvious observation that annualised returns of 18.47% for the last five years is an astonishing number and well above any historic average.


So, how volatile were key types of investment in 2021? The table below looks at volatility for a bunch of asset classes during 2021, as measured by the US Federal Reserve St Lous. You can see the chart online HERE

The dominant purple line at the top is the volatility of the oil price, which, as you’d expect, was all over the place during 2021. But what I find astonishing is that sometimes the volatility of China ETF’s (the green line) was greater than that of the oil price – I counted four times where the China ETF vol exceeded oil. If that doesn’t put off most long-term investors in China, I don’t know what will. Another interesting observation is that the blue line – S&P 500 volatility – largely kept track with gold price volatility. Sure, equities were more volatile, as you would expect, but not by THAT much. And again there were numerous times when equity market volatility dipped BELOW gold volatility for days on end. One doesn’t have to be a cynic to wonder whether this market behavior is a tad strange.

Lithium prices

2021 was the year the batteries and battery power hogged the news headlines. Much as I like to be a contrarian, I’m not sure 2022 will be any different. The chart below is from S&P and shows the rapid rise in lithium hydroxide and carbonate prices.  Lithium carbonate prices in China extended their rally to 250,000 yuan per tonne in December, finishing the year on another all-time high, an unbelievable increase of over 400% since January. Prices were driven up throughout the year amid imbalances between current global supply levels and the metal’s surging demand.

According to Nick Lawson of Ocean Wall, an investment advisory service based in London working with hedge funds and family offices Pilbara Minerals – one of Australia’s biggest lithium producers – finished 2021 by slashing its shipping forecasts – further exacerbating the tight supply. S&P Global are forecasting a 5,000 mt LCE deficit for 2022 – compared to a surplus of 66,000 mt for 2020 and 8,000 mt deficit for 2021.

Lawson at Ocean Wall reckons this supply cut will help keep prices high for the foreseeable future.

“Electric vehicle deliveries in China are expected to total 3 million units this year, more than double last year, and forecasts point to more than 5 million sales in 2022. Meanwhile, bets on long-term scarcity of the light metal set EV manufacturers to race each other for long-term contracts, as lithium miners compete for contracts and face continued opposition from environmental groups….And where do lithium prices go from here? With LCE at an all-time high we are now in new territory. With a significant lithium deficit hanging over the market for the foreseeable future and demand only increasing it’s hard to see prices going down, so the question must be just how high will they go? Lithium properties are being bought for production development at a rapid pace, but it can take up to 5 years for a project to go into production. So, these properties are not likely to having any impact on supply for 2-5 years. “

Weekly dashboard

Every week, I’ll start with a dashboard of key measures. There’s no science behind this – it’s just the range of measures that I use to work out whether the markets look cheap, over-priced, or anything in between. In box 1 below, I’ve provided some of the explanations behind the measures used in the table.


My opinion: US equities (and therefore, the rest of the developed world) still look bullish BUT less so than last week. That US sell-off adds a note of caution and VIX volatility is rising. Note that the US markets are now below the 20 day MA but UK equities remain bullish. The govie spread is also falling closer to zero.