Keep A Long-Term Market Perspective

The U.S. equity markets have been quite hostile of late. Amid all of the current gloom and uncertainty, it’s important to remember that the volatility inherent in stocks is why we get paid to hold them for the long run. It is truly a matter of perspective. Take the chart below.[1] We have had two record highs this year followed by two 10% plus corrections. December has been particularly brutal. If 2018 was our only frame of reference, no rational person would ever own stocks.

Yet, looking at U.S. stocks going back to 1921, you can see that, despite setbacks along the way, stock prices have moved steadily higher over the long term.[2]

Stock returns generally follow corporate earnings over the long run. In the short run, though, stock prices can be decoupled from corporate earnings and the economic realities that exist at the time. Corporate earnings are positively influenced by economic growth. The chart below shows the growth of the U.S. economy post-WWII.[3] As you can see, since 1947, the U.S. economy has grown from about $2 trillion dollars of economic output to almost $20 trillion dollars. You can also see the time periods of recession, as indicated by the shaded areas. These recessions cause the economic output of the U.S. to take a step back and temporarily impact stock returns.

The chart below shows the range of average returns of stocks, bonds, and a 50% stock/50% bond portfolio over various time frames.[4 ]As you can see, the average annual stock returns for the rolling 20- year periods beginning in 1950 through the end of 2017 was +7% to +17%. Compare that with the range for one-year periods of -39% to +47%. Investing in stocks is truly a long-term investment game plan.

Benjamin Graham who is widely known as the father of value investing wrote two seminal books on investing: (1) Security Analysis (1934)[5] and The Intelligent Investor (1949).[6] In The Intelligent Investor, Graham introduced a hypothetical character called “Mr. Market”. Mr. Market was described as being schizophrenic in the short run, but rational in the long run. Mr. Market was also described as being a voting machine in the short term and a weighing machine in the long run. What’s the difference? Voting is based on belief. Weighing is based on fact (I can attest to this personally). Warren Buffett described The Intelligent Investor as being the best book on investing ever written. This is high praise from one of the best investors of our time (maybe all times).

Stock market volatility like we have experienced in 2018 is never fun and makes all investors somewhat uncomfortable. It may be tempting to stop the pain by getting out of the market. But don’t fall into the trap of trying to time the market. Remember that graph of the market’s long-term returns? Periods of distress like we are currently experiencing barely even register in retrospect. So, keep your eyes focused on the long term and remember that successful long-term investing requires having the discipline to stay invested through the inevitable ups and downs you will experience.

Footnotes

1. Yardeni Research, Inc. (December 2018).

2. Same.

3. Same.

4. Barclays, Bloomberg, FactSet, Federal Reserve, Robert Shiller, Strategas/Ibbotson, and J.P. Morgan Asset Management. Returns shown are based on calendar year returns from 1950 to 2017. Stocks represent the S&P 500 Shiller Composite and Bonds represent Strategas/Ibbotson for periods from 1950 to 2010 and Bloomberg Barclays Aggregate thereafter. Growth of $100,000 is based on annual average total returns from 1950 to 2017.

5. Security Analysis by Benjamin Graham and David Dodd (6th Edition, 2009).

6. The Intelligent Investor by Benjamin Graham (Rev. Edition, 2003).

The information in this report was prepared by John Weitzer, Chief Investment Officer of First Command. Opinions represent First Command's opinion as of the date of this report and are for general informational purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. First Command does not undertake to advise you of any change in its opinions or the information contained in this report. 

This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Should you require investment advice, please consult with your financial advisor. Risk is inherent in the market. Past performance does not guarantee future results. Your investment may be worth more or less than its original cost. Your investment returns will be affected by investment expenses, fees, taxes and other costs.