Power to the People, Money to the Markets

From Nick Colas, Chief Strategist at Convergex:



When you consider “The 1960s” as a cultural period in history, many of the most important events of this tumultuous decade came in just one year – 1968. A few of the headlines then:

  • Both Robert Kennedy and Martin Luther King assassinated.
  • The number of American soldiers killed in Vietnam reaches its high at 16,889 in that year.
  • In Chicago, anti-war protesters clash with police and in front of TV cameras that show the violence in prime time to the entire country.
  • A national strike throughout France and student protests in Paris cripple the French economy and then-President de Gaulle briefly leaves France, fearing a revolution.
  • Two American athletes give the black power salute during the playing of the national anthem at the Mexico City games, one of the decade’s most iconic images. Back in the U.S., senior Black Panther Party members stand trial and there are several open gun battles between the group and police on the streets of LA and Oakland.
  • Czechoslovakia briefly tries to shrug off Soviet domination during the “Prague Spring”, only to be invaded by half a million Warsaw Pact forces later in the year.

Despite all those social upheavals, the S&P 500 crossed 100 for the first time on June 4th, and the index was up 10.8% for the year. And therein lies the lesson for today: as troubled as 2016 has proven to be, it is no 1968. You may not like who won the Presidency this time around, but at least all the candidates – and every other important political figure in the campaign – are still alive.  Not so back in 68…

History shows a similar story elsewhere in the last century.  The S&P 500 was up 23% in 1963, the year of the John F. Kennedy assassination.  U.S. stocks doubled during America’s involvement in World War II.  The lesson: you can have the very worst, saddest headlines you could ever imagine and equities will still perform well.  That’s just the way markets work. 

So what does it take to really crack U.S. equity markets wide open?  Let’s look at every major pullback (+20%) since 1928, as measured by annual returns, and their causes:

  • The Great Depression, when stocks declined by 65% from 1929 to 1932. A combination of excessive stock market valuations and disastrous monetary and fiscal policy mismanagement. 
  • The 1937 “Echo” recession caused by excessive tightening of both fiscal and monetary policy, with stocks down 35% that year.
  • The open stages of World War II (1939 – 1941), with U.S. stocks down 23% over that three year stretch.
  • The 1973 – 1974 Saudi oil embargo and resulting U.S. recession, with stocks down a combined 37% over those two years.
  • The bursting of the 1990s tech stock bubble, 9/11 attacks (2000 to 2002) and recession, which took the S&P 500 down a combined 37% over those three years.
  • The Great Recession (37% decline for the S&P 500 in 2008) caused by the bursting of the U.S. housing bubble and Financial Crisis and subsequent recession.
  • Yes, there are other times the S&P 500 has been down over 20% (the 1994 Fed rate cycle comes to mind, but there are others) but recovered before the year was out. We’re just counting year to year returns here, painting with broad brush strokes.  You can see the data for yourself here 

And that’s pretty much it – 6 times in almost 90 years where U.S. stocks have really hurt investors over a year or longer on a total return basis.  Granted, all of them left a real mark in investor psychology, with the most recent bear market still an unhealed scar for many.  And for those readers in their 40s or older, you have seen half of all the market dislocations since the Great Depression.  Congrats on that…

The message here is not to be complacent, but rather to be aware of what really moves markets.  Social unrest is more likely an outcome of a financial shock than a cause of one.  The 2011 Occupy Wall Street movement, for example, was an outgrowth of the Financial Crisis and obviously not a cause of the 2008 meltdown in stocks.  And let’s not forget U.S. stocks are up 95% since September 2011 (the peak of the OWS movement).

So if you want to be bearish, don’t use politics as a part of your investment thesis; 2016 has had its share of surprises, after all (Brexit and Trump), and stocks are doing just fine.  And that’s entirely in keeping with history, not in spite of it. 

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