1. More money is lost due to INVESTOR fear and greed-emotional reactions to politics and short-term market gyrations-than all the financial, economic, and geopolitical events combined. In the last 20 years through 2019, US Stocks averaged 6.1% per year; Government Bonds: 5%; Inflation: 2.2%; the average investor: 3.9%.
2. When fear drives investors to sell in a “herd mentality,” buy! If your friend, newsletter du jour or financial pundit advises you to get out, it is most likely the best time to buy. Staying invested long-term gives higher returns than trying to time the market.
3. Markets have performed well under both parties. The S&P 500 delivered an average annual return of about 11% the past 75 years, through both Democratic and Republican administrations. Neither party can lay claim to superior economic or financial market performance. The best annualized Real GDP Growth of 5%/5.5% occurred under Kennedy (#1) and Johnson (#2). The #3 spot goes to Clinton (4%); and Reagan is 4th with an average 3.5% GDP rate. Ford and Carter are in a virtual tie at approximately 3%. Nixon & Eisenhower oversaw 2.5%; Obama, Trump, Bush, Nixon and Bush 2%. Annualized stock market performance (S&P 500) was highest during the Ford and Clinton presidencies-18%-20%. Obama witnessed the 3rd best stock performance at approximately 18% per year. Bush Sr., Eisenhower and Reagan also had good stock market years averaging 15%-18%. Only 2 Presidents-GW Bush and Nixon-oversaw negative returns during their terms. Carter and Trump (through June 30, 2020) stock markets averaged approximately 12%. So, based on economic growth alone, the top Presidents were Kennedy, Johnson and Clinton; based on stock price movements, the top Presidents were Ford, Clinton and Obama, with Eisenhower and Reagan very close behind. More important for having bad returns is not who is President or who controls Congress but how many days the investor is out of the market. Missing the 30 best days in the past 25 years drops returns below the rate of inflation; 80% of those days occurred during the tech bubble bursting, the global financial crisis, and the COVID outbreak. In the last 25 years through March 31, 2020, $100,000 fully invested 100% of the time in just the S&P 500 grew to $856,394; missing the best 10 days grew to $392,332; the best 30 it grew to $147,254. Missing the best 40 days or more led to annualized negative returns over all those years. Daily returns on these best days ranged from 4.4% (April 5 and September 18, 2008 and January 21, 2009, to 11.6% (Oct 13, 2008)! The best daily returns during the depth of the COVID downturn ranged from 4.6% to 9.4% from March 2 through March 26. Smart investing means buying, not selling, good companies during crisis downturns.
4. The odds of winning at a casino are under 50%. Since 1901, the stock market (DJIA) has had positive 1-year returns 73.5% of the time. The longer you bet at the casino table, the lower the odds of winning; the longer you stay invested in stocks, the higher your odds of better returns.
5. We misremember the facts. Jimmy Carter presided over significant job growth. Under Reagan, income (average weekly earnings growth) grew by almost 20% for those in the 50th percentile of the population ranked by income. With Obama, the U.S. had one of the longest disinflationary environments on record
despite fears that his policies would be massively inflationary. Capital expenditures under Trump are below their historical growth rate despite a large corporate tax cut. (Corporations used their tax savings not to invest, i.e., plant and job expansion, but to increase dividends and buy back their own stock.)
6. Each generation faces challenges that seem unique and overwhelming. In retrospect, they are neither. Consider two world wars, the Cold War, the assassination of our President, the resignation of another, 9/11. The investment in good companies with creative advancements for society, for a “better life,” has led stocks higher since the Great Depression. Neither Presidents nor Houses of Congress radically reengineer the U.S. economy. Major legislation is infrequent and predictions of impact when it is passed is usually wrong. In fact, predictions have been wrong more often than not if someone that conservative/progressive is elected. For instance, predictions were that the Affordable Care Act would destroy small business hiring. But since, 2010, 8.6 million jobs have been added in this sector. Capital expenditures expected to increase with the corporate tax cut under Trump as explained above have not occurred. So, regardless of party in power, business investment and government spending cannot be predicted but have been remarkably consistent as a percent of GDP. Monetary policy (the Fed) matters more, i.e. falling interest rates. Markets like easing financial conditions, not tightening.
7. Stock prices going down (downside volatility) does not mean a loss unless you sell. From 1984 to 2019, the S&P 500 declined 5% in every year but two. The median intra-year decline over the past 36 years is -9.6%. Still, stocks have posted annual gains in 30 of those 36 years, averaging 14.4%. Market corrections are opportunities to buy good companies on sale.
From 1978 through 2019, $100,000 invested in real estate (Schiller Home Price Index) grew to $560,000; gold $686,000; government bonds (Bloomberg Barclays US Treasury Index) $1.7M; large cap stocks (S&P 500) $10.3M; small cap stocks (Russell 2000 Index) $11.4M.
8. The stock market is like a mountain range (accent on range). New highs, over time, are the norm. There are peaks on every mountain, some higher, some lower than the last, but the key is to keep hiking the range, both the downs as well as the ups. Yes, bear markets are scary. Since 1945, there have been 5 severe bear markets that took 4 years to recover, however, 5 less severe bear markets took 2 years to recover; 14 bear markets took only 7 months to recover; and 41 times, 3 months to recover. We never know how long a bear market will last but this year’s bear market lasted not even a month! Without multiple clear indicators a bear market looms, better to stay invested and buy if there is a downturn.
9. Partisan politics and political angst are not economic indicators. If they were, right now we would be in a Great Depression. The Misery Index, a combination of unemployment and inflation, is the indicator to watch. Ignore politics. Ignore pundits. Ignore hype. Pay attention to jobs and inflation.
10. Having a financial plan and portfolio diversification across asset classes is the best path to avoid feeling the need to chase last year’s best performers. Many years have witnessed the prior year’s best asset class fall to the bottom in performance. In 2019, the best asset class was U.S. large cap stock; 2018-the U.S. aggregate bonds; 2017-emerging markets stock; 2016-U.S. small cap stock; 2014 & 2015-REITs; 2013-U.S. small cap stock; 2012-emerging markets stock….
*The data and summarized points are taken from market and economic presentations by Odell Lambroza, Chief Investment Strategist, Advent Capital Management, LLC and Brian Levitt, Global Market Strategist with PIMCO Investment Management Co. Their data sources include Haver Analytics, Bureau of Economic Analysis, Bureau of Labor Statistics, Bloomberg, Goldman Sachs, DALBAR, Investment Company Institute, and FactSet.