“Be greedy when others are fearful.”
– Warren Buffet
In last month’s article, we explored how to see opportunity in crisis. This month, we look at the track record of financial media through the lens of magazine covers.
The New Normal
Every major bear market looks different while you’re in it. The blended stock price of 500 of America’s largest companies doesn’t decline by 30 percent unless something is significantly wrong. Each crisis seems, in some fundamental way, to be unlike anything we’ve faced before. Thus, the COVID-19 pandemic and the economic distress it has caused seem entirely unique in history.
As we find ourselves without historical comparisons, the equity market becomes unhinged from fundamental analysis. We can’t begin to estimate a fair value for stocks because we can’t imagine how deeply earnings will decline, how much dividends will be cut, and how long it will take for the economy to stabilize and return to growth.
In the resulting climate of fear, human nature defaults to the conclusion that this time it’s fundamentally, and even fatally, different. That’s always human nature’s rationale for panic—and it is panic on an epic scale that drove the market down 34 percent in the 33 days through March 23rd this year.
Any time a “black swan” event, like a terrorist attack, global financial meltdown, or pandemic, strikes the world, people have a difficult time predicting how we will come out of it. Typically, most people start thinking that the world that will greet them on the other side will be fundamentally changed, and in very negative ways. Without fail, the media begins to share opinion pieces, magazine covers, and headlines talking about the new normal that will emerge after the crisis.
Ever since billionaire hedge fund investor Bill Ackman claimed in a TV interview back on March 18th that “America will end as we know it,” we’ve been reading articles that discuss the new normal in the world economy. They describe how the economy that emerges from the quarantine will look nothing like anything we have known before. These articles sound very smart and compelling, and they are certainly scary—and they are a constant feature of crisis moments, such as we are currently experiencing.
These articles are the most reliable sign that uncertainty, fear, and panic are at their peaks. They mark the moments when investors who remain rational can take advantage of opportunities created by those who are gripped by fear. This is because the “new normal” economy that always emerges from these crisis moments is bigger, better, and more rewarding for patient equity investors.
Magazine Covers: This TIME Is Different
With the perspective of history, these “new normal” predictions usually seem to miss the mark, and sometimes even look downright comical when seen through the rear-view mirror. One of my favorite ways to illustrate this is to look back in time at some examples from prior crises and think about how their predictions turned out.
Over the years, I’ve seen any number of pieces documenting the apocalyptic reporting in the media by quoting the text of articles describing every passing economic/financial Armageddon. Recently, I read a thoughtful (and funny) article. It related each major incident of doom-and-gloom rhetoric to the corresponding article in TIME magazine. As you read these, please keep in mind the S&P 500 trades for around 2,850 today.
This text and research are courtesy of Joel Beyer of 215 Advisors, LLC, a Registered Investment Advisor in California and Arizona. Thank you, Joel!
“In June, the falling stock market, with $3.5 billion in paper values wiped out in three months, had its worst bear-shaking and hit its lowest point since 1945. There was reason for pessimism. By July, unemployment, said the Administration, had almost doubled and stood at 4,000,000, the highest in seven years. Unionists grumbled angrily that the Government’s figures were cockeyed, that unemployment was really much higher. Croaked Henry Wallace’s Progressive Party: ‘The depression is here.’”
– TIME, January 9th, 1950 (S&P 500 Stock Index Closed At 17)
“Many people worry about the size of the $272 billion federal debt. But not so many worry over a far bigger U.S. debt: the money borrowed by individuals and corporations (which, incidentally, supports the greatest peacetime boom in history). For houses alone, Americans have gone $84 billion into debt; to expand and modernize, industry has borrowed $200 billion. Altogether, while the national debt has remained near its wartime peak since World War II, private and corporate debt has more than doubled, to a record $330 billion, or $4,000 for every man, woman and child in the country. Are Americans getting in over their heads? Will the boom collapse under the weight of private credit as it did in 1929?”
– TIME, August 3rd, 1953 (S&P 500 Stock Index Closed At 25)
“Tens of thousands of Americans crowded into the board rooms of the nation’s 3,400 brokerage offices last week, gathered for a somber performance. ‘Well,’ sighed one tape watcher in the Beverly Hills office of Ira Haupt & Co., ‘now I’ve got 30% less than I had last Friday.’ In one hectic week, the paper value of the 1,545 stocks listed on the Big Board plunged by $30 billion — which is more than the combined gross national product of Australia, Sweden and Ireland. …As wave after selling wave buffeted blue chips and glamour stocks indiscriminately, the Dow-Jones index of 30 key stocks tumbled almost 39 points last week to 611.88, the lowest level since Jan. 4, 1961. Following suit, stocks on the American Exchange and over-the counter markets plummeted to similar lows.”
– TIME, June 1st, 1962 (S&P 500 Stock Index Closed At 59)
Cover: Is the U.S. Going Broke?
“Can a nation with a trillion-dollar economy be running out of money? That startling question is forcing itself upon every government official who must shape a budget, from President Nixon down to the head of the smallest local mosquito-abatement district. By most measures of private wealth, the U.S. is the world’s richest country. But in terms of its ability to pay for the public services—health care, education, welfare, garbage pickup, pollution control, police and fire protection—that make the life of its citizens pleasant, or at least tolerable, or in some cases even possible, the country seems almost to be going broke. Today, that hubris has been drowned in a rising sea of red ink. In 1970, federal, state and local governments spent $60 billion more than they took in, and the deficit certainly yawned even wider last year. Meanwhile, taxes keep going up and up.”
– TIME, March 13th, 1972 (S&P 500 Stock Index Closed At 107)
Cover: That Monster Deficit: America’s Black Hole“At the very least, Government deficits of such unprecedented magnitude threaten to boost interest rates, reignite inflation, discourage capital investment and hinder growth. At worst, the budget imbalance could stop the recovery cold. Warns Volcker: ‘If left unattended, the deficits will accumulate until they undercut all that has been achieved with so much effort and so much pain.’ …Unfortunately, the business cycle has no respect for the political cycle. If Congress and the White House insist on avoiding until 1985 the difficult measures needed to control the deficit, the chance to keep the recovery going and assure the future health of the U.S. economy may slip irretrievably away.”
– TIME, March 5th, 1984 (S&P 500 Stock Index Closed At 158)
“If America’s economic landscape seems suddenly alien and hostile to many citizens, there is good reason: they have never seen anything like it. Nothing in memory has prepared consumers for such turbulent, epochal change, the sort of upheaval that happens once in 50 years. That may explain why so many voter polls, taken as the economy shudders toward the November election, reveal such ragged emotional edges, so much fear and misgiving. Even the economists do not have a name for the present condition, though one has described it as ‘suspended animation’ and ‘never-never land.’…The outward sign of the change is an economy that stubbornly refuses to recover from the recession. In a normal rebound, Americans would be witnessing a flurry of hiring, new investment and lending, and buoyant growth. But the U.S. economy remains almost comatose a full year and a half after the recession officially ended. Unemployment is still high; real wages are declining. At a TIME economic forum last week, forecasters predicted that U.S. growth would amount to only 1.8% this year and 2.6% for next, about half the speed of a normal recovery. The current slump already ranks as the longest period of sustained weakness since the Great Depression.”
– TIME, September 28th, 1992 (S&P 500 Stock Index Closed At 417)
Cover: Will You ever be able to retire with stocks plummeting?
“Stung by a jobless recovery on the heels of the first recession in a decade and by a 2 1/2-year slide in stock prices that on Friday left the market at a five-year low, Americans are more worried about their financial future than at any other time since the turbulent ’70s. They flocked to stocks in the roaring 1990s, only to see $7.7 trillion of paper wealth incinerated. If the scandal and collapse at Enron had been isolated, the nation’s deflated sense of opportunity might have been repaired by now. Instead, the lid has been lifted on bogus revenue generating schemes throughout the energy and telecom industries; earnings deception on an even broader scale; and the frightening failure of accountants, stock analysts, board directors and regulators to protect the nation’s retirement assets. ‘These people have all lost credibility and should be prosecuted,’ says Parry. ‘I’ve lost faith in the whole darn market.’ ‘Stocks and other investments are expected to grow more slowly than usual for years to come.’”
– TIME, July 29th, 2002 (S&P 500 Stock Index Closed At 899)
“From the beginning of May until late June, stock markets worldwide declined sharply, with losses surpassing 10%. The first weeks of July brought only marginal relief. Ominous voices began to warn that the weakness of stocks was a direct response to the stalling of an economic recovery that has lasted barely a year. Anxiety over debt-laden European countries — most notably Greece — combined with stubbornly high unemployment in the U.S. to create a toxic but fertile mix that allowed concern to blossom into full-bloom fear.”
– TIME, August 2nd, 2010 (S&P 500 Stock Index Closed At 1126)
“As COVID-19 Crashes the Economy, Workers and Business Owners Wonder If Anything Can Save Them From Financial Ruin…. The stomach-turning ride on global financial markets took a dramatic turn Monday, with U.S. stocks plunging the most since 1987 after President Donald Trump warned the economic disruption from the virus could last into summer. The S&P 500 sank 12%, extending losses as Trump said the economy could fall into a recession. Equities opened sharply lower after central bank stimulus around the world failed to mollify investors worried about the damage the coronavirus is inflicting on economies. The negative superlatives for American stocks are piling up. The S&P wiped out its gain in 2019 and is now down almost 30% from its all-time high. The Dow Jones Industrial Average lost almost 13%, falling 3,000 points to close at a two-year low. The Russell 2000 had its worst day on record, losing more than 14%. ‘This is different. The thing that is scarier about it is you’ve never been in a scenario where you shut down the entire economy,’ said Steve Chiavarone, a portfolio manager with Federated Investors. ‘You get a sense in your stomach that we don’t know how to price this and that markets could fall more.’”
– TIME, March 19th, 2020 (The S&P 500 Stock Index Closed At 2409)
Well, there you have it, all the doom, gloom, and despair you could ever imagine. These stories, some separated by seven decades, could easily be exchanged one for the other. The last 70 years have featured untold doom, gloom, world wars, terrorist attacks, Y2K, swine flu, bird flu, coronavirus, oil embargos, oil spills, increasing energy prices, nuclear meltdowns, poverty, recessions, inflation, housing bubbles, high unemployment, increasing taxes, corporate and municipal bankruptcies, hurricanes, floods, tsunamis, tornadoes, presidential assassinations, soaring national debt, threat of thermonuclear war, Communism, Nazism, Socialism, political incompetence, union extortion, corporate malfeasance, and 13 cataclysmic “end of the world” bear markets that nobody thought we could ever recover from.
Despite all of that, a hypothetical person who invested $10,000 into the S&P 500 on January 9th, 1950, and who never paid any attention to any of the media-hyped front-page-news events that unfolded in the world over the next 70 years, looked at their account value on March 19th, 2020, only to find that their one-time investment of $10,000 had grown to $1,410,648, averaging 7.30 percent per year (not even including dividends!).
This TIME is never really different. It’s simply an unpredictable pattern of economic fluctuation within the permanent historical uptrend, which the media reports as “the beginning of the end of the world,” in order to capture an ever-growing number of viewers and readers for their advertisers. It has always been this way. It will always be this way. This TIME is never really ever different.
Having A Plan
As we endure this coronavirus crisis, it is worth restating our overall principle of investment advice. It is goal-focused and planning-driven, as sharply distinguished from an approach that is market-focused and driven by current events. Long-term investment success comes from continually acting on a plan. Investment failure proceeds from continually reacting to current events in the economy and the markets.
We are long-term equity investors, working steadily toward the achievement of your most cherished lifetime goals. We make no attempt to forecast the equity market since we accept that the equity market cannot be consistently timed by us or anyone. We believe that the only way to be sure of capturing the full premium return of equities is to ride out their frequent but ultimately temporary declines. We do this because, at least historically, the permanent advance has triumphed over the temporary declines.
Our essential principles of goal-focused portfolio management remain unchanged. The only benchmark we should care about is the one that indicates whether we are on track to accomplish our financial goals. Risk should be measured as the probability that we won’t achieve our goals. Investing should have the exclusive goal of minimizing that risk.