“Life is unfayeh” JFK
Last week I spoke about our beliefs in the face of a dramatically changing world. This week, allow me to reflect on last year and what we see in the future.
Life is unfair (or unfayeh, as JFK might have said). Often, investments are best when they feel the worst. Worse yet, our equity portfolios tend to do better when what we were told was important (the economy, corporate earnings, etc) are worsening. If you doubt this, look at the past two years we just lived through.
2019 was the exact opposite of the previous year. Calendar year 2018 was stellar for both the US economy and for corporate earnings. For the equity markets, 2018 ended with a dramatic thump, and the SP500 dropped nearly 20% in just three months. (1) Calendar year 2019 was it’s mirror image: equity markets hit all-time highs but the economy’s growth was lackluster and US manufacturing declined.
In 2019, US equity markets recovered to new highs by April. The equity markets rose again mid-year and then they rose quickly near year’s end. As of the time of this writing, equity markets are again on the rise. These three waves of equity success accompanied at least three shades of Armageddon. Not a trade war, nor an impeachment, nor a decline in corporate earnings brought an end to our party.
Our apocalypse du jour, Coronavirus, aka Kung Flu, is not likely to crash the market, in my opinion. On the other hand, I’d wager a bet that 2020 will not deliver the same returns we earned in 2019. I believe we are invested in some of the best-run companies in the USA and the world. This fourth rise—even if it is moderate—will last…until it does not.
Remember, our average intra-year short-term decline in equity markets is close to 15 percent. (1) This, I hope, is not news for you. You have experienced worse—recently—and you did not panic.
Historically, you do better than most investors, by and large, when you stay the course. In the middle of 2018, net liquidation of US equity mutual funds and ETFs soared to levels not seen since the panic of 2008. For the investing public, pessimism is the norm. For them, panic is preordained. Advertisers on the news channels pay for this; news media depend upon this. Sellers of equities last year may have missed the gains—and may still be sitting on the sidelines today, at great cost.
Their panic gives me great hope and confidence that we may not be near the end at all. All my experience, education and continuous testing of my beliefs, tells me this: market melt downs do not begin in a world full of fear. Quite the opposite—they happen when the great masses are overly confident. When stocks are cocktail party conversation topics, when everyone is borrowing against their home equity to buy a fix ‘n flip house, when oil hits $180 per barrel and when…you get the idea. Humans are emotionally conditioned to be horrible investors.
These are assuredly not the good times, feeling-wise. But I think they are, in fact, the very best times to ignore our feelings. Ignore our short-term-bouncy equity portfolios. Shift our focus to the long-term, real-life financial plans which bring us calm assurance. Whatever the world throws our way, we will outlast. We did so in 2018, and 2019, and will again in 2020.