Bringing the Evidence Home

So, a buddy was in our office a couple of weeks ago and as our conversation became increasingly tangential, we landed on the binary topic of – Are You An Optimist Or A Pessimist?

Face it, in daily conversations we are asked to make binary decisions.  Are you a Republican or a Democrat?  Do you like Fords or Chevys?  As regards the ever-popular Stock Market Predictions the question is poised – Are You Bullish Or Bearish?

I suggest there is room for “Rational Optimism”“The Optimist Who Expects Routine Mayhem”!  As regards our dear friend, The Stock Market it seems “Rational Optimism”, if you look at history, may be the most rational perspective.

Let’s Look At The Case For “Optimism” And “Routine Mayhem”:

  • OPTIMISM: The enclosed chart shows that the S&P 500, including dividends, rose 1,100-fold over the last 70 years.  Wow!  Fantastic!  If history repeats itself, as it has a way of doing, we can be “Optimistic” about the future.
  • MAYHEM: The following narrative reveals that while all of this dandy long-term growth was unfolding and compounding…”Mayhem Occurred Routinely”!

Permit Me To Itemize Some Of “The Mayhem”:

  • Stocks Decline 28.4% (May 1946 to May 1947) Soldiers return from World War II, and factories across America return to normal operations after years of building war supplies. This disrupts the economy. Real GDP declines 13% as wartime spending tapers off.
  • Stocks Decline 20.6% (June 1948 to June 1949) The Economy suffers a second post-war U.S. recession.  Inflation surges as the economy adjusts. The Korean conflict heats up.
  • Stocks Decline 14% (June 1950 to July 1950) North Korean troops attack along the South Korean border. The U.N. Security Council condemns North Korea.  The U.S. gets involved.
  • Stocks Decline 20.7% (July 1957 to October 1957) The Suez Canal crisis manifests itself, the Soviets launch Sputnik and the U.S. slips into recession.
  • Stocks Decline 26.4% (January 1962 to June 1962) Stocks plunge after a decade of solid economic growth and market boom, the first “bubble” environment since 1929.
  • Stocks Decline 22.2% (February 1966 to October 1966) The Vietnam War and Great Society social programs push government spending up 45% in five years. Inflation takes off.
  • Stocks Decline 36.1% (November 1968 to May 1970) Inflation really starts to pick up, hitting 6.2% in 1969 up from an average of 1.6% over the previous eight years. Vietnam War escalates. Interest rates surge; 10-year Treasury rates rise from 4.7% to nearly 8%.
  • Stocks Decline 48% (April 1973 to October 1974) Inflation breaks double-digits for the first time in three decades. There is the start of a deep recession; unemployment hits 9%.
  • Stocks Decline 19.4% (September 1976 to March 1978) The economy stagnates.  High inflation.  Adjusted for inflation, corporate profits haven’t grown for eight years.
  • Stocks Decline 17.1% (February 1980 to March 1980) Interest rates approach 20%, the highest in modern history. The economy grinds to a halt; unemployment tops 10%.
  • Stocks Decline 27.1% (November 1980 to August 1982) Inflation has risen 42% in the previous three years. Consumer confidence plunges, unemployment surges, and we see the largest budget deficits since World War II. Corporate profits are 25% below where they were a decade prior.
  • Stocks Decline 33.5% (August 1987 to December 1987) The crash of 87 pushes stocks down 23% in one day. No notable news that day…historians still argue about the cause.
  • Stocks Decline 19.9% (July 1990 to October 1990) The Gulf War causes an oil price spike. Short recession. The unemployment rate jumps to 7.8%.
  • Stocks Decline 19.3% (July 1998 to August 1998) Russia defaults on its debt, emerging market currencies collapse, and the world’s largest hedge fund goes bankrupt.
  • Stocks Decline 49.1% (March 2000 to October 2002) The dot-com bubble bursts and 9/11 sends the world economy into recession.
  • Stocks Decline 14.7% (November 2002 to March 2003) The U.S. economy puts itself back together after its first recession in a decade. The military preps for the Iraq war. Oil prices spike.
  • Stocks Decline 56.8% (October 2007 to March 2009) The housing bubble bursts, sending the world’s largest banks to the brink of collapse. The worst crisis since the Great Depression.
  • Stocks Decline 16% (April 2010 to July 2010) Europe hits a debt crisis while the U.S. economy weakens. Double-dip recession fears.
  • Stocks Decline 19.4% (April 2011 to October 2011) The U.S. government experiences a debt-ceiling showdown, U.S. credit is downgraded, oil prices surge.
  • Stocks Decline 11.9% (June 2015 to August 2015) China’s economy grinds to a halt; the Fed prepares to raise interest rates.
  • Stocks Decline ??.?% (Month/Year ‘X’ to Month/Year ‘Y’) Mayhem happens and sellers show up in droves.

Perhaps when investors adopt “Rational Optimism” and decide to “Become Optimists Who Expect Mayhem To Occur Routinely” those investors will enjoy a reasonable level of tranquility while observing and enduring what’s going on around them?  Those investors may find themselves in the Best Seats Possible in the stadium of unfolding events.

I recommend that you make Investment Decisions based on neither the binary vagaries of Optimism nor Pessimism; rather, base your Investment Decisions on the Guiding Lights of your personal Goals and “Rational Optimism”!

Click Here to View a Slide Demonstrating “Constant Mayhem Amid Long Prosperity”…

Yours truly,

Warburton Capital Management

Data Is From Sources Deemed To Be Reliable But Not Guaranteed.

Print Friendly, PDF & Email