Haven’t We Seen This Movie Before?

SeanInsights

By Sean Curley, CFP

Several years ago I read an explanation of why children like to watch the same shows over and over, and why they like to play repetitive, very simplistic games like peek-a-boo. The basic explanation was that such activities provide a sense of structure and predictability, make them feel secure, and allow them to re-process the experience and thereby better learn about how the world works.

Apparently, I am a lot like a three year old because there are some movies I can watch over and over, and never grow tired of. At the same time, I really don’t like movies that are terribly suspenseful – horror movies where you just know someone’s about to get it . . . just way too much suspense for me, which really takes the enjoyment out of watching. However, once I’ve seen such a movie, there really isn’t much to the suspense, because I know exactly what’s going to happen — and when, and the fear of the unknown holds no power.

That is very much how I feel about the recent market activity – I’ve seen this movie before, and I know how it ends. If history is any guide, and I believe it is, then here is the basic plot: Market goes up, then due to some human frailty (usually greed and/or stupidity working in tandem), it goes up more than perhaps it should. Reality eventually takes hold, followed shortly thereafter by panic or near panic, and the market drops precipitously over weeks or months, sometimes even lasting a year. When there is not one person left who can bear the pain or anxiety of another down day, week, or month, the market begins its recovery, often in a spectacular fashion, erasing the losses – and eventually the memories – for those who managed to stay firmly grounded, and, historically, more-than compensating the brave souls who managed to hang in there. Of course, as with all horror films, there are victims – in this case, those who had forgotten how these movies end, and who almost always manage to exit the market at the worst moment only to get back in after all the lost ground has been recovered.

So it was in 1973-1974, which was a terrible period in the US economy and markets. Similar to what we’re seeing now, oil prices were approaching what were then all-time highs on the heels of an OPEC oil embargo, the US economy fell into deep a recession from 1973 to 1975 with unemployment topping 9%, and inflation would eventually reach 13% by the end of the 1970s.

At the worst of it, from October if 1973 through September 1974, the S&P 500 and the Dow were both down over 40%, and even a well-diversified equity investor who held a globally diversified all equity portfolio of global stock indexes[1] would have been down 34%. The Dow, which reached 1,000 in early 1973 before plunging to 575, would not surpass the 1,000 mark again for any sustained period until 1982. This was not an easy time to be an equity investor.

So, how did such a hypothetical portfolio fare? Well, here were the returns (rounded to the nearest percent) for that year and the ensuing nine years:

Oct 73 – Sept 74: – 34%
Oct 74 – Sept 75: +37%
Oct 75 – Sept 76: +32%
Oct 76 – Sept 77: +22%
Oct 77 – Sept 78: +45%
Oct 78 – Sept 79: +14%
Oct 79 – Sept 80: +21%
Oct 80 – Sept 81: + 0%
Oct 81 – Sept 82: + 6%
Oct 82 – Sept 83: +58%

For clients who were 60% in equities, 40% in fixed income, the decline was even less dramatic, as were the ensuing positive years.

So, the period from October of 1973 through September 1974 was very difficult, even for well-diversified investors, but those who managed to hold tight had a very positive year experience in the years that followed, including that very bad twelve months. Despite an extended period of economic malaise in the U.S. that lasted from 1973 through the early 1980’s, for a patient and globally well diversified equity investor, the period from 1973 to 1974 was a short-lived, albeit temporarily painful, excursion on the way to capturing a decade of very positive returns.

So, sometimes these movies last longer than we like, but I think we’ve all seen this one before.

As always, I’m always happy to talk, so please feel free to call or email if you have any questions or if there is anything I can do for you.

Footnotes

1. For purposes of this hypothetical portfolio, the following indexes were used: equal positions (16.67%) in the following equity asset classes: MSCI EAFE Index, U.S. Micro Cap Index, S&P 500 Index, US Large Cap Value Index, International Small Cap Index, US Small Cap Value Index. Indexes can not be invested in directly and the returns do not account for any inherent trading costs.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and/or hypothetical in nature and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. No strategy ensures success or protects against the possibility of loss.