But What About the Really Bad Markets

Harry Truman famously said, “The only thing new in the world is the history you do not know.”  So here are the most important data points from recent history to keep in mind when thinking about investing through difficult times.

Over the last 50 years, the S&P 500 has been cut in half three times:  

  • From January 1973 – October of 1974 the market was down 48%.  

    • There was a recession with GDP down 3.2%

    • The unemployment rate peaked at 9%

    • The oil embargo went into effect and gas prices quadrupled in four months.

    • Inflation went skyrocketing.

    • Watergate, as Gerald Ford put in his inaugural address, was “our long national nightmare.”

  • From March 2000 – October 2002, the S&P 500 lost 49%.  

    • The dot-com bubble burst.  

    • Nasdaq was down 80%.

    • September 11th attacks.

    • Enron and the accounting scandals

    • A recession.

  • From October 2007 – March of 2009, the same index lost 57%.  

    • Global financial crisis 

    • Subprime mortgage catastrophe

    • Longest, deepest recession since the 1930s

    • Unemployment peaked at 10%.  

 

That all sounds bad and scary.  However, despite those three instances where the stock market valuations were cut in half (not to mention all the other bad things that happened along the way), from 12/31/1972 to 12/31/2022, the S&P 500 index, earnings, and dividends all went up significantly more than inflation.

The Important Takeaways:
Despite the market losing nearly 50% on three different occasions, the average annual compound rate of total return for the S&P 500 over this period was 10.2% – about equal to the 100-year average.  These things have happened in the past, and they will happen again.  Unfortunately, there is no way of knowing when.  The only way to be sure of achieving the premium returns of equities is to ride out their often significant but always temporary declines.

Now, if you are reading this and thinking, “That is all well and good, BUT I’m retired and don’t have 50 years left to invest!” That’s okay.  In next week’s letter, I’ll revisit how retirees should think about their equity allocations as they get older.

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When Would You Rather Outperform?