Success for All

 

The U.S. stock markets have been growing steadily over the last 18 months. This is a welcome respite from the bear market that gripped nest eggs from March of 2000 through October of 2002 - a 31-month time period representing the longest and worst drop of stock prices since the Great Depression. So how should investors view these ups and downs in the markets?

 

First of all, it is important that we understand investing involves understanding the concept that everyone can be a winner. Yes, that means everyone can have a piece of an ever-expanding pie. Every investor can have a successful experience. With capitalism, market returns are essentially there for the taking. Investing is not a zero-sum game.

 

The chart below shows the history of United States bull and bear markets based on the S&P 500 Index over a time period of more than seven decades.

U.S. Bull & Bear Markets

S&P 500 from 1926-2003

Note the duration of the bull markets vs. the bear markets. In total, bull markets have dominated in the United States more than 80 percent of the time. The bull runs went up a total of 3684 percent vs. going down a total of 451 percent during the bear cycles. Furthermore, the average gain for the 14 bull market time periods was 263 percent. This compares to an average loss of 35 percent for the 13 bear markets. Is it now easier to understand our absolute confidence in capital markets?

 

With this data in mind, consider all of the events that have occurred since the 1920s: two World Wars, the Korean War, Sputnik, the Cuban Missile Crisis, the assassination of President Kennedy, the Vietnam War, President Nixon’s resignation, hyper-inflation, Iran hostages, oil embargoes, Black Monday, the Persian Gulf War, President Clinton’s impeachment, the terrorist attack of 9-11 and the Iraq war.

 

Furthermore, three of these events in particular had a sudden and shocking impact on the psyche of the American people and on the securities markets. The surprise attack on Pearl Harbor was instigated by a rogue nation in search of global dominance. The Kennedy assassination was carried out by a supposed lone gunman of counter political persuasion. The 9-11 attacks in New York and Washington were perpetrated by terrorist groups not affiliated with any single sovereign government. While all of these were different, all threatened the very fabric of our society; and in the case of Pearl Harbor, even the existence of our society. These events had a negative impact on the stock markets. The chart below shows the number of days it took the Dow Jones Industrial Average to recover to the pre-tragedy level.

 

Tragedy	Date	DJIA Closing	Days to Recover
Pearl Harbor	December 7, 1941	112.52	334
Kennedy Assassinated	November 22, 1963	711.49	4
9/11	September 11, 2001	8920.70	59

 

We can see that the recovery from these horrific events was relatively short, as the billions of daily economic factors took control and overcame the negative effects. Capital markets are resilient even in the very worst of circumstances.

 

2003: A Recent Case in Point

 

When we consider the results of the equities markets in 2003, how could anyone have ever predicted what would transpire? Consider the following: the SARS epidemic from Asia, the start of the Iraq war, the plunging U.S. dollar, the mutual funds scandal, continued corporate malfeasance in major corporations, and reports of an overall weak economy with slow job growth. Yet in the midst of all of this, a stock investor would have had to be completely unlucky to earn less than 25 percent. The large cap U.S. stocks had their best year in the last five, large international stocks had their best in the last 17, and micro cap stocks had their best year in 36 years.

 

The Dow Jones Industrial Average hit its low on March 11th at 7524 and then proceeded to climb almost 3000 points by the end of the year. Investors were naturally nervous early in the year due to all the bad news. There are many who stayed on the sidelines watching as the bad news continued and the stock market climbed. The lesson: get in and stay in. Bad news and events will have an affect on the markets, but it will recover.

 

No other nation or economic system has ever existed like the one we are blessed to be a part of. In light of the phenomenal economic system we call capitalism; optimism is the only logical reality. Fear of loss should be replaced by hope of change. Hence, investors can see investment fluctuations in a whole new light. You should no longer mistake variability for loss, and you should desire to have market return through positive market change. Given this paradigm, we can now argue that stocks are actually safer than bonds when our objective is to protect our long-term financial cost of life.

 

Will we still experience difficult markets periodically? Count on it. When? Who knows? And furthermore, who cares? As long as we have the system that allows prices to seek their own way, then economic growth will occur. With this in mind, shouldn’t investors be most afraid of not being in the market when it goes to 20,000 rather than being in the market if it goes down to 2,000? In time, one is certain to happen, the other is not.

 

 

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