American gas has gone to $6 per gallon…run for your lives! Before you go, please remember to pack a lunch, bring lots of hydration and dig into a little research: According to the US Bureau of Economic Analysis, energy, and food consumption as a share of disposable income are also historically low. Data from the Bureau of Labor Statistics show gasoline and other fuels account for 2.9% of Americans’ spending, a little more than half of what it was during the late 1970s and early 1980s.
People can feel Inflation and it upsets the monthly budget. The economics of rising prices becomes an emotional issue. A sort of angst rises and permeates consumer consciousness. The last forty years have been a period of productivity, gains, and price stability. The powerful combination of innovative technologies, supply chain management and low-cost manufacturing globally have all been factors that kept the average American shopper in a cocoon of stable prices. That comfort has flipped to $45+ increases to fill up a vehicle, grocery prices moving up, and a general trend of higher cost of living.
There is now a powerful fear in the air as commentaries abound about the evils of cheap money, low interest rates, and fiscal recklessness. John Authers recently wrote in Businessweek regarding the recent era of low inflation, “Demographics were favorable, with working-age populations growing and saving for the future; globalization—notably China’s insertion into the global market—held down labor costs; commodity prices stayed under control in comparison with the 1970s, with only a brief interruption when a bull market in oil turned into a price spike in the pre-crisis summer of 2008. In such an environment, inflation wasn’t difficult to tame”. The narrative for 2022 is that a brand-new world with supply and demand problems that could be insurmountable.
Investors will be in for a lot of scary talk. Crisis mentality fearfulness like post 9-11 or 2008 has now taken shape as inflation is now the monster under the market’s bed. Fears of terrorist nihilists blowing up the world (2001) or the collapse of residential home values (2008) have faded and are now rarely discussed. We will now need to face the idea that COVID and Putin have changed our world for the worse. The negative market of 2022 is now six months old, estimates based on bear market history would suggest that the average bear market lasts 10 months to 1.3 years. The downswing can last much longer as the historical averages have limited utility and cannot predict what we will need to bear.
The fact is that there are continuous scares and negative events. These frightening environments must be traversed to realize the benefits of long-term investing. A walk through recent history can illustrate the drama and challenges which have been constant throughout modern times. It is helpful to catalogue a sample of negative events that have occurred over the past few decades to see the adversity long term investors have faced. The list below should be contemplated while also appreciating that the S&P 500 has gone from 1283 on January 2, 2001 to 3785 recently.
2001 – Terrorist tragedy of 9-11
2002 – Corporate accounting scandals of 2002 including Worldcom, TYCO and Aldelphia
2003 – US Invades IRAQ
2004 – High Oil Prices / Mid-East conflict
2007 – Subprime crisis begins
2008 – US Recession
2009 – US Unemployment tops 10%
2012 – “US Fiscal Cliff”
2016 – Global populist wave
2017 – US / China “Trade War”
2020 – COVID-19 Pandemic
2022 – Russia invades Ukraine
This brief list allows for some perspective on the difficult events of the last 20 years. The challenges of the past are little remembered in the face of the scares of today. Being mindful of the resilience of the economy to overcome these previous events is critically important for the goal of building wealth with a buy and hold strategy.
During this difficult bear market, the perspective of recent market results is useful. Here are the S&P 500 total returns over the last 22 years:
| Year | Total Return % |
| 2022 YTD | -21 |
| 2021 | 28.71 |
| 2020 | 18.4 |
| 2019 | 31.49 |
| 2018 | -4.38 |
| 2017 | 21.83 |
| 2016 | 11.96 |
| 2015 | 1.38 |
| 2014 | 13.69 |
| 2013 | 32.39 |
| 2012 | 16 |
| 2011 | 2.11 |
| 2010 | 15.06 |
| 2009 | 26.46 |
| 2008 | -37 |
| 2007 | 5.49 |
| 2006 | 15.79 |
| 2005 | 4.91 |
| 2004 | 10.88 |
| 2003 | 28.68 |
| 2002 | -22.1 |
| 2001 | -11.89 |
| 2000 | -9.1 |
To maintain our conviction in the process of long-term investing, it is crucial to have a broad historical perspective. When the narrative turns intensely negative, a view of middle and long run trends can be helpful. This broader view helps illustrate that the most recent three years delivered 31, 18, and 28 percent returns in the US markets. The current flow of negativity is centered around the year-to-date numbers. There is a great disadvantage in taking a six-month period and drawing conclusions about what future results might be.
The above 22-year sample included two primary downswings initiated by the 2001 attacks on the US and the 2008 “Financial Crisis”. The current bear market is driven by a sequence of events that began with COVID-19 and has met the geopolitical catastrophe in Ukraine. Future events are unknowable, yet if we can take the time to observe past challenges that have been overcome, that framework may allow us to stay the course and reap the benefits of long-term equity ownership. To find success in the process of investing, the perspective of a business owner during challenges is required, particularly when downswings grind on our mindset.
Aswath Damodaran teaches corporate finance and valuation at the Stern School of Business at New York University. The NYU professor’s website has an incredible amount of data related to market history and stock valuation. “Historical Returns on Stocks, Bonds and Bills: 1928-2021” is an illuminating data set that provides return numbers going back to 1928.
| Inflation Adjusted Arithmetic Average Annual Real Return | |||||
| S&P 500 | 3-mo T-Bill | 10-Year T. Bonds | Baa Corp Bonds | Real Estate | |
| 1928-2021 | 8.48% | 0.35% | 2.28% | 4.27% | 1.27% |
| 1972-2021 | 8.13% | 0.63% | 3.42% | 5.61% | 1.27% |
| 2012-2021 | 12.39% | -1.21% | 2.84% | 5.59% | 3.52% |
There are two things in the above table from Damodaran’s data that stand out. The first is that the returns on the S&P 500 from 2012 to last year were significantly above historical averages. This is crucial to understanding the current downswing. The recent market gains may have been ahead of the actual underlying economic values of companies represented by the S&P 500 index.
The longer-term numbers above are why we invest. The S&P 500 stands alone as the path to building wealth in the long run. The storms of negativity are a part of the process that is the most difficult, yet most important. Holding an investment portfolio during the upswings is easy. The down markets are what put successful investors to the test.
Professor Damodaran’s data is what the long term buy-and -hold philosophy is based on. We may intuitively think that dodging to cash when things are negative could allow for “safety,” yet this ignores the improbability of accurate timing. The odds of successful wealth building through navigating economic events in advance is no different than tarot cards and crystal balls. According to Ned Davis Research, “Half of the S&P 500 Index’s strongest days in the last 20 years occurred during a bear market. Another 34% of the market’s best days took place in the first two months of a bull market—before it was clear a bull market had begun.”
In 1965 the musician Barry McGuire had a modest hit single titled, “Eve of Destruction”. The chorus is thematic of the mid 1960’s angst:
But you tell me
Over and over and over again, my friend
How you don’t believe
We’re on the eve of destruction
Check out the video of a performance, exhibiting of fears of the past.
The 1960’s were certainly challenged by war, riots, and domestic unrest in the US. It was thankfully not the “Eve of Destruction”. My recollections are nil as I was getting into some serious napping, baby food, and beginning the pursuit of some glorious toddler activities. I have little memory of this time. It has been a theme of my dear mother that I was quite the emerging genius.
I completely missed the experience of the 1973-74 bear market as a nine-year-old with a passion for my Schwinn Sting Ray bicycle and other activities of early development.
There is currently a large volume of commentary regarding the inflationary period that occurred in the 1970s. The S&P 500 lost 21% in the first half of 1970, during a period of high inflation that the current environment has been compared with. It gained 27% during the last six months of that year.
Here are a few highlights of the era:
May 1970 – President Nixon, at a news conference, defends the U.S. troop movement into Cambodia, saying the operation would provide six to eight months of time for training South Vietnamese forces and thus would shorten the war for Americans. Nixon reaffirmed his promise to withdraw 150,000 American soldiers by the following spring.
1971 – Nixon suspends Gold Standard and imposes 10% import tariffs along with price controls. This was a massive federal government intervention into the private sector; First Video Cassette Recorder (VCR) introduced
1972 – The Munich Massacre was a terrorist attack during the 1972 Olympic Games. Eight Palestinian terrorists killed two members of Israeli Olympic team and then took nine others hostage. The situation was ended by a huge gunfight that left five of the terrorists and all the nine hostages dead.
1973 – Supreme Court issues Roe V. Wade decision, OPEC oil embargo
1974 – The Watergate scandal reached its climax with the resignation of President Richard Nixon in the wake of impeachment in the House of Representatives
1975 – Saigon Falls, US Leaves Vietnam
1976 – Apple Computer Founded
1977 – Trans-Alaska Pipeline was finished
1978 – US Deploys test satellites for the deployment of The Global Positioning System (GPS)
1979 – Fifty-two American diplomats and citizens were taken hostage in Tehran
The introduction of the video cassette recorder in 1971 may be the least remembered item of the above list. Arcane historical facts are paramount when we imagine them in context of YouTube, Netflix, and the power of all types of video tech. This is just one example of the progress of technology and the potential for productivity and cost reduction across a wide range of human activities.
Think of a technician taking video and transmitting it back to an engineering team. Commerce now has training materials being continuously updated in real time. Picture an earnest high-school student participating in a university classroom via Coursera. At mooc.org it is stated, “Massive Open Online Courses (MOOCs) are free online courses available for anyone to enroll. MOOCs provide an affordable and flexible way to learn new skills, advance your career and deliver quality educational experiences at scale. Millions of people around the world use MOOCs to learn for a variety of reasons, including: career development, changing careers, college preparations, supplemental learning, lifelong learning, corporate eLearning & training, and more.”
These technologies were hardly imagined in the 70s. Internet, cellular, and GPS technology have transformed agriculture, manufacturing, and all manner of industrial capacity that will adapt to the challenges of the 2020s. It is common to seek historical templates when faced with elements of familiarity. The recent decades of price stability have now moved to frightening headlines that proclaim the “highest inflation in 40 years”. These fears ignore the very innovations that will now be put to work seeking profit across the business spectrum of our times. The capitalist pursuit of success is one of the forces that can bring about supply and demand equilibrium and greater price stability.
Contrast the 1960’s dystopian video above with this innovative company named Droneseed. The company is developing techniques for planting seedlings 200 times faster than previous methods using drone aircraft to reforest after fires. The amount of effort that is occurring across a massive spectrum of small companies is something that does not grab the attention of headlines, yet it is what our economic future is made of.
Inflation is one of the great challenges of capitalism and free markets. The solution to high prices can be the price itself. As gasoline becomes more expensive, personal and professional behaviors attempt to adapt. Commercial transportation faces even greater challenges as goods must be manufactured and transported. Without profit incentive, energy prices could theoretically spiral upwards. Historically this is not the case, as production and refining operators cannot resist the profit opportunities the higher prices present.
Modern technologies and innovations are monumental in economics. Productivity is a key element to rising living standards. Efficiency in business will also reign in the pace of inflation. We are in the midst of a challenging transition that began in 2016 with an unbridled populist narrative that sought to harvest public resentment towards all manner of things international, globalist, or immigrant.
The invasion of Ukraine has galvanized this trend. Putin’s transgression of the economic order that has existed since the fall of the USSR creates headwinds for multinational business. Populist political actors will broadcast a message of isolationism without regard to the massive markets that US companies seek across the globe. The idea that we can shut out the world beyond our shores ignores the fact that isolation has never been the case.
On March 2, 2018 a message went out from the president of the USA, “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win, when we are down $100 billion with a certain country and they get cute, don’t trade anymore – we win big. It’s easy!”
On May 20, 2022 The Wall Street Journal published Who Won the U.S.-China Trade War? From the essay, “Economists routinely say that no one wins a trade war because costs rise on all sides. If that’s the case, the U.S., which started the fight and eventually slapped steep tariffs on three-quarters of everything China sold to the U.S. to force changes in Chinese economic policy, lost by not winning. There is plenty of evidence for a U.S. loss. During a trip to Beijing in May 2018, top Trump administration officials laid out their demands: cut the bilateral trade deficit by $200 billion, end subsidies for advanced technology, halt pressure on U.S. companies to hand over technology and strengthen intellectual property protection. The list was so sweeping that Michael Pillsbury, a China expert at the Hudson Institute and a favorite of President Trump, said “it would be like the Chinese flying into Washington and telling us to change our Constitution.”
We are likely to hear a rising volume of proclamations regarding “de-globalization”. Realization of this dynamic and the US turning further inward may be the greatest threat to future economic growth. Hopefully there will be new charismatic figures that emerge in our domestic politics to shape policy in ways that lift rather than stunt out multi-national operators. I am sure that Ford, Coca Cola, Visa, and other global competitors would agree.
As a teen I bought my first stock in Kmart (too bad I did not buy Walmart). In this early stage I began my journey of learning about building wealth that led to my path as an advisor. October 19, 1987 was a watershed moment for markets when the S&P 500 index declined 22% in a single day. When the dust settled on October 20, 1987, the index stood at 225. I remember hearing about the market drama while on campus. The decline was unprecedented, and I decided to go home and check in with my dad to see what it might mean.
Ronald Shink was planted on the couch with his Wall Street Journal and assorted newspapers watching Financial News Network, a new cable outlet covering markets. Dad seemed calm and I distinctly remember him saying there was no point in jumping out of the window as our two-story home was not of the required altitude to do real damage. Humor during distress was a lesson that I learned at key moments from my father.
His prescription was to wait, stay patient as a lot of damage was already done. “Son, we are investors, not traders.” I like to think that he said something to that effect at the time. I think it may have been more like D*mnit. With the facts and numbers of history, we can see the S&P 500 index closed one year to the day on October 19, 1988 at 279 or just over 20% higher than the panic low that had been set on the historic day referred to as “Black Monday”. The year 1987 is a period often cited as illustration of how staying patient and avoiding selling out during a dramatic decline is the best tactic when faced with a disturbing downswing.
Unfortunately, downswings don’t always comeback in neat one-year sequences. Thinking of higher numbers in twelve months may be optimistic as 2022 has qualities that have been built up for more than 13 years since the last “crisis” of 2008.
With a heap of sarcasm, Papa Shink used to say, “It is an American right to $2 per gallon of gasoline for life.” It is notable that in 2015 adjusted dollars, one gallon of gasoline in the United State has ranged from $1.95 in 1960 to $2.45 in 2015 with a peak of $3.08 in 2012.
Apparently, markets are fine when the price of a home rises, stock portfolios increase in value, and the cost-of-living index raises someone’s Social Security payment. The narrative of angst at the current spike in gasoline prices is intriguing to observe. The outrage of the American driver stands in utter denial to the reality that prices across all manner of goods and services tend to rise over time.
The timeline for recovery from the recent market decline is unknowable and not in any way guaranteed. These times of negativity and vigorous selling all have their own unique qualities. 2022 is being spoken of as a time of “great loss” without regard to the run up that occurred in 2020, 16% total return on the S&P 500 followed by 26% in 2021. The downswing that we are now facing is event driven. What is even more burdensome to the current price levels is how much has been gained over the last decade. When you combine difficult economic environments with high prices, declines and prognostications of hard times ahead are revealed like moss in a shady forest.
These negative periods take on a powerful narrative as price levels are never guaranteed or granted with any level of certainty. Human instinct to preserve rises and fears of broad decline take great fortitude to overcome.
It is crucial to recognize that the cure for falling prices is lower prices. Let us look at the price of three well-known companies during the negative period of 2007-2010. PG – Proctor and Gamble; HD – Home Depot; MSFT – Microsoft
| Date | PG | HD | MSFT | ||
| January 1, 2007 | 64.87 | 40.74 | 30.86 | ||
| April 1, 2009 | 49.44 | 22.92 | 20.26 | ||
| January 1, 2010 | 61.55 | 28.01 | 28.18 |
These equity prices are not recommendations. The above chart is an example of how declining prices have recovered in the past. It is crucial to remember that the fundamental dynamics of supply and demand are perpetually cycling as higher prices inevitably attract fewer buyers and lower prices ultimately draw more bidding and buyer interest.
Dividends are a key component of portfolio total return. Since 1926, dividends have contributed approximately 32% of total return for the S&P 500. Dividend income and capital appreciation potential are important factors for long term results. We must continuously recognize that the dividend is a crucial element of long-term ownership of a given portfolio. Thinking like a business owner who is paid profits over time can help maintain patience during times of falling prices.
Investors are not traders. The long-term equity investor is effectively a business owner, and the trader is passing through looking to buy low and sell higher. It is impossible to estimate what portion of dramatic price moves are simply attributable to those seeking to buy and sell for profit. The technological advancement of communications technology has been combined with high-speed computing to continuously seek dimes, nickels, pennies, and even fractions of pennies per trade.
These trading entities serve a crucial market function as they stand with bids and offers that create market liquidity. Traders allow investors to periodically sell shares when desired. Times of dramatic downswing yield a concern that these snipers of profit can lend a downward inertia to the actual negative economics of the day, week, or fiscal quarter. The stocks, indexes and markets overall are puzzles of infinite complexity that attract the smartest operators on earth in pursuit of that magic process or formula to put ideas in one side and take money out of the other.
That trader making an offer may know little and not care whatsoever about the business of tech, healthcare, or any other type of business in the effort to flip for a gain. The traders will always be lurking, while investors attempt to live with the swings.
Paul Dolan, professor of behavioral science at LSE, believes people respond pessimistically to questions about national or international performance (Social Pessimism) for various reasons:
Individuals rarely think about grand issues such as the state of the nation or world, and so respond with an ‘on-the-spot’ answer that may not be well considered or even a true reflection of their beliefs.
The framing can influence the individual’s response. Moreover, the question itself may bias responses; ‘who would bother to ask if everything were okay?’
Responses to questions such as these (and more general questions about happiness or life satisfaction) are heavily influenced by ephemeral recent events. In psychology this is referred to as the ‘availability bias’.
Our judgement may suffer from a bias related to transient events or framing. The Gapminder Ignorance Project – which studied how wrong or right people are informed about global development – suggests the reason for all this ignorance is:
“Statistical facts don’t come to people naturally. Quite the opposite. Most people understand the world by generalizing personal experiences which are very biased. In the media the “news-worthy” events exaggerate the unusual and put the focus on swift changes. Slow and steady changes in major trends don’t get much attention. Unintentionally, people end-up carrying around a sack of outdated facts that you got in school (including knowledge that often was outdated when acquired in school).”
This heuristic to see the unknowable in dark and threatening terms fits into our human instinct to fear the unknowable. From a survival or evolutionary standpoint, it makes sense that we are not prone to assume that the unfamiliar is safe or positive.
As an advisor, I have observed a significant bias of pessimism, particularly during times of distress and downswing in the markets. This dynamic drives people to explain to me, (and themselves) how everything is going to be terrible for a long time.
Another explanation put forward by Martin Seligman, professor of psychology at the University of Pennsylvania, suggests a link between control and optimism. If we feel more in control of our lives, we tend to be happier, healthier, and more optimistic about the future. This could also help to explain the gap between individual and societal optimism: since we are in direct control of our own lives but not the destiny of the nation, we feel more optimistic about ourselves.
Let us all try to keep in mind that we are continuously fooling ourselves with instinctive thinking that does not fare well for future results.
Base Rate Fallacy: When provided with both individuating information, which is specific to a certain person or event, and base rate information, which is objective, statistical information, we tend to assign greater value to the specific information and often ignore the base rate information altogether. This is referred to as the base rate fallacy, or base rate neglect
Recency Bias: In behavioral economics, the recency bias (also known as the availability bias) is the tendency for people to overweight new information or events without considering the objective probabilities of those events over the long run.
Apophenia: The tendency to perceive a connection or meaningful pattern between unrelated or random things (such as objects or ideas) What psychologists call apophenia—the human tendency to see connections and patterns that are not really there.
Let’s fight these human shortcomings together. Better times and results may await if we can stay patient and hold on to the quality diversified portfolios that are the essence of the wealth building process.
Please note: material discussed is meant for general/informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss.