Often, media tells us the world is too scary, the news is just too bad, and there are just too many negatives in the world for stocks to rise. In reality, the world has always faced risks and stocks have risen despite the challenges the world has faced. Still, investors may think that although past scary times worked out ok, this time it’s different.
But today is not as different as people fear. Part of this misconception can be attributed to innate human behavior. Humans evolved to forget past pain quickly. While that may have been a useful survival instinct, it can make investing tougher today. Looking back, we may believe we were level-headed when facing past fears, but the reality is we often weren’t.
However, you may believe that present times are an exception and the world truly has become more volatile than ever. Heightened geopolitical tensions are present across the globe. Political conflict is everywhere you look. But are politics truly more contentious now? Political rhetoric has always been heated—anyone who tells you we’re more divided now than in the past just doesn’t know US history. Political inﬁghting is continual, both in the US and abroad. Geopolitical tensions have been present for longer than the last few years. What about natural disasters? The world has experienced natural disasters for a long time.
Why should investors care about the frequency of natural disasters, or whether political tensions are higher than usual? Because it’s human nature to exaggerate current events in our minds and misremember past events. Do you really believe that global politics are more strained now than ever? What about for all of the Cold War? Or during the Cuban Missile Crisis? What about US debt? It was well over 100% of GDP in World War II’s aftermath. Large-scale disasters? Remember Chernobyl? And in the US, we’ve seen periods of food and gas rationing, been hit on our own soil in Hawaii, New York and DC, and had embassies attacked overseas. We’ve had oil shocks, strikes, recessions, riots, hyperinﬂation, deﬂation, accounting scandals, impeachments… the list goes on.
Through it all, stocks have risen overall. No US or global bear market has ever been initiated by a natural disaster. Even geopolitical tensions (outside of the start of World War II in Europe) have not had a long-lasting negative impact on stocks.
The world can be a pretty darn scary place—turmoil of all types is a regular occurrence. But even throughout unstable times, capital markets remain resilient. If you think it is better to wait until the world calms down before you start investing, you could be waiting a long time. And if you avoid investing during years of turmoil, you may miss out on critical years of growth. Consider that stocks have been up 73% of all calendar years—which includes those seemingly overly tumultuous years.[i]
If you still doubt the power of capital markets, consider the following examples of tumult and the stock returns that year.
In 1939, Germany and Italy signed a military pact, Poland was invaded and World War II began. Stock returns that year? -1.4%. The following year, 1940, France fell to Hitler, the Battle of Britain occurred, and Wall Street regulations were passed. Returns that year? 3.5%. In 1941, the attack on Pearl Harbor occurred, Germany invaded the USSR, and US declared war on Japan, Italy and Germany. Returns that year were 18.7%.[ii]
Jumping ahead to the 1960s, in 1961 the Berlin Wall was erected, Green Berets were sent to Vietnam, the Bay of Pigs invasion failed, and the Freedom Riders civil rights movement happened. That year, stock market returns were 20.8%. The next year saw the Cuban Missile Crisis, the Cuba embargo and China/India border conflict, along with -6.2% stock returns—hardly a bear market. 1963 saw President Kennedy assassinated, the South Vietnam government overthrown, and segregation debates intensify. Stock market returns were 15.4% that year.[iii]
In more recent years, 2008 saw the steepest calendar-year stock market declines since the 1930s—down -40.3% during the global financial panic. However, the very next year stock returns were up 30.8% even as unemployment exceeded 10% and US auto bailouts occurred. The year after that, stocks were up 12.3%, while the year saw PIIGS sovereign debt scares as well as major health-care and financial reform laws passed in the US. [iv]
Stocks may not be positive every year, and global events can have an impact on stocks. But the impact likely doesn’t play out how you expect it, and claiming that “this year it’s different” loses its sway when looking back at history.
So how is it that stocks still rise in the face of chaos, events of great suffering, and global ordeals? The truth is, scary things are frequent in this world. The big frightening events that are well known are priced into the market quickly. These priced-in events usually lose the ability to hurt stocks.
That isn’t to say that stocks don’t wildly wiggle in the near term. They certainly can. But proﬁt motive is an intensely powerful positive force. It’s at the root of capitalism and the success of free, democratic, capitalistic nations. Challenges and obstacles don’t drain proﬁt motive. In fact, challenges and the drive for innovation can help as people take risks to chase future proﬁts. Capital markets are resilient because humanity is resilient.
Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.
[i] Global Financial Data, Inc., as of 01/18/2019. S&P 500 Total Return Index from 01/31/1926 to 12/31/2018. The S&P 500 Total Return Index is based upon GFD calculations of total returns before 1971. These are estimates by GFD to calculate the values of the S&P Composite before 1971 and are not official values. GFD used data from the Cowles Commission and from S&P itself to calculate total returns for the S&P Composite using the S&P Composite Price Index and dividend yields through 1970, official monthly numbers from 1971 to 1987 and official daily data from 1988 on.
[ii] Sources: Global Financial Data, Inc., as of 01/18/2019. Returns are provided by Global Financial Data, Inc., and simulate how a world index, inclusive of dividends, would have performed had it been calculated back to 1934.
[iii] Sources: Global Financial Data, Inc., as of 01/18/2019. Returns are provided by Global Financial Data, Inc., and simulate how a world index, inclusive of dividends, would have performed had it been calculated back to 1934.
[iv] Sources: Global Financial Data, Inc., as of 01/18/2019. Returns are provided by Global Financial Data, Inc., and simulate how a world index, inclusive of dividends, would have performed had it been calculated back to 1934.
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