Client’s Corner: This Wasn’t Supposed to Happen

Category: Blog

AS I WRITE, IN THE RUN-UP TO THANKSGIVING, THE S&P 500 Index has significantly breached 3,100. Should it end the year there, it will have advanced nearly 24% from its December 31, 2018 close of 2,507. Add a couple of percentage points of return from cash dividends, and 2019 will turn out to be one of the greatest years in one of the greatest bull markets in history.

But that’s actually not the remarkable thing.

What is most noteworthy about the equity market’s great advance is the fact that it wasn’t supposed to happen. At least not according to the financial journalism I was reading, seeing and hearing all year. For, even as the market made new highs in three great waves, the media were full of incipient Armageddon:

  • “Trump’s tariff wars,” as they were universally called, were said to be tipping not just America’s but the world’s economy inexorably into recession.
  • An “earnings recession”—that is, a pullback in the earnings of the S&P 500 companies from their blazing leap of last year—was unfolding before our very eyes.
  • Manufacturing in this country was slipping into decline. And
  • The president of the United States was getting himself impeached.
  • These, we were told, were the inevitable disasters that must surely bring the market down in utter chaos at any moment. (We were presumably to ignore ephemera like the most dynamic labor market of my lifetime—if not ever—with far more people working for far higher wages than ever before, especially in those segments of the population that had lagged up until now.)

Yet—seemingly out of sheer cussedness—the market refused to behave. It steadily made up all the ground it had lost in the last four months of 2018, then broke out into new high ground at the end of April. What happened next is, in this observer’s judgment, the most significant event of the year that’s now passing away.

In early May, President Trump suddenly erupted in his most bellicose tweet yet, threatening the Chinese with tariffs on a scale hitherto unimaginable. Over the course of that month— bottoming on June 3—the equity market went down seven percent. (For perspective, the average annual drawdown in the S&P 500 since 1980 is just less than 14%.) But wait: that’s not the significant event.

The significant event was the reaction of the investing public. To wit: net liquidations of equity mutual funds and ETFs—absolutely, and relative to net inflows into bond funds and money markets—hit levels not seen since the Great Panic in 2008.

Stay with me on this if you will, dear reader: a decline of only about half the annual average, over just four weeks, sent people fleeing from equities on a scale last seen in the existential economic crisis of our time. What does that say to us about the state of investor psychology in 2019?

Well, to me, it says that financial journalism’s clickbait catastrophism won out over the reality of the market’s resilience. On the one hand, equities had just made up all their 2018 losses, and hit new highs. On the other, media’s 24/7 shrieking about impending doom reached its own new heights of hysteria. And the investing public bought the Armageddon narrative, in preference to what the market was trying so hard to tell them.

Whatismostnoteworthyabouttheequity market’s great advance is the fact that it wasn’t supposed to happen. At least not accordingtothefinancialjournalismI was reading, seeing and hearing all year.

Inevitably perhaps, when this mini-orgy of capitulation blew itself out, the market made more new highs in late July—and then broke out a third time, quite powerfully, in late October. That latest leg up is still in progress as I write.

Thus, to me, 2019 is most noteworthy not for its stellar returns, but for the object lesson it teaches us—indeed, the one the equity market is always trying to teach us. Namely, that pessimism always ends up getting mugged by reality.

If, with your financial advisor’s tough-loving guidance, you learned that lesson in 2019, then no matter how much or how little you participated in equities this year, you had a great year—because you learned something genuinely priceless for the future.

© December 2019 Nick Murray. All rights reserved. Used by permission.

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