There is concern in some quarters over the length of the current stock market recovery, world events and a myriad of other financial influences. In evaluating those concerns, it may be illustratively productive to view our current market and world context against similar periods in the past. While history is not guaranteed to repeat, it does give us a framework to form judgments over current and future occurrences. Teenagers think that this (their) time is different from all of the rest, but adults come to recognize the repetitive nature of history.
I have been struck by the parallels between the 1920s/1930s and the last 20 years. The period of the 1920s were not characterized by a steadily upward market and business climate. The decade, and the one preceding it, had their peaks and valleys, but the decade certainly presented a definitive upward bias culminating in a flurry of business and market investment. The 1990s, and the decade preceding it, are characterized in the same way. The 1990s ended in a flurry of similar speculation and an over abundance of investment opportunities coming to market, just as did the 1920s.
Both decades ended with a significant downturn in stock values. 1929 through 1931 and 2000 through 2002 are very similar in nature and offered a severe downturn in stock prices. In both cases, established company stocks went down and lesser seasoned companies and speculative stocks declined much more, with some companies going out of business entirely.
The middle years of the 1930s and the middle period of the decade beginning in 2000 were both recovery models from significant downturns. Then in 1937/1938 the country experienced an echo of the earlier part of the decade in downturn. Similarly, 2007/2008 offered a very severe downturn. In both time periods, a slow and painful recovery began thereafter.
At that same time right after 1937/1938, the world began to understand the horrific effects of creeping totalitarianism, just as we are seeing right now. 1939 through 1945 gave us a World War. We don’t know what the next few years will bring us, but it is not a stretch to characterize what we are currently experiencing as a “world war” against radical barbarism.
We can’t know where history is taking us and trying to predict is fruitless. Further, finding parallels between these two periods of our history is only entertaining unless we bring it to some conclusions. Let’s try. The stock markets’ reacted to the events of the 1920s, 1930s and 1940s with a positive return. A dollar invested at the top of the U.S. stock market at the end of the bull market in 1929 and before the Crash, as represented by the Standard & Poor’s 500, would have fluctuated wildly. By the end of World War II, that dollar was worth $1.96 if left invested.1 So investing at the top of the market and utilizing good quality investments as represented by the 500 largest and best capitalized U.S. companies would have allowed for an almost doubling of invested capital during the two major depressions of the 1930s and the world war years of the 1940s. If the exercise were carried through the rebuilding years of the 1950s, the results would be even more startling.
We can’t rely on a repeating of history, but we can become much more informed and gain confidence by putting today in the context of history. And if we consider the buffeting effects of asset allocation, we can make a compelling case for the text book principles of investment management that we practice at Fragasso Financial Advisors. Call us to see how we can assist you toward your life’s goals with clarity and confidence, unfettered by unreasoned emotionalism and fear.