Why is the Stock Market Skyrocketing During a Contested Election and Pandemic?
Answer: I have absolutely no idea. Never ever forget: The stock market is illogical. Trying to time the market is impossible.
Let’s take this moment to look at history and remind ourselves how the stock market can weather any storm.
Even the Spanish American War.
Let’s go waaaay back in history.
Warning: What I am about to share with you is not my opinion. What I am about to share with you is simply data. Facts.
I often talk about how, in the past 100 years, the stock and bond markets have shown remarkable consistency. The patterns they exhibit are so clear that it’s impossible to ignore.
But let’s dig deeper. Maybe this past century was an anomaly. What about the 1800’s?
That’s right, we are going back to the days of the Louisiana Purchase and the Civil war.
In past articles I have spoken at great length about how stocks had returned an average of 10% during the 20th century, but what about the 19th century?
Now remember, the lightbulb wasn’t invented until 1879, and the leading cause of death in 1900 was tuberculosis.
So, how did the stock market hold up? We have good data from Dr. Jeremy Siegel who wrote the fantastic book, Stocks for the Long Run.
His data shows that from 1801-1900 the stock market returned an average of 6.51%.
At first glance that appears to be a little disappointing, especially considering that from 1901-2000 the stock market returned an average of 9.89%.
But all is not as straight-forward as it seems. You see, in the 1800’s the country saw very little inflation. In fact, something that cost $1 in the year 1800, cost a little less than a dollar one-hundred years later in 1900.
That means that after inflation, stocks from 1800-1900 returned 6.76%. And from 1900-2000, after inflation, the stock market returned a real return of 6.45%. You need to subtract out inflation from stock returns to get the real return- the amount of purchasing power your money has grown after inflation.
1. The stock market, after inflation, has had a similar average return for over 200 YEARS.
2. Going forward, while no one can guarantee what will happen, don’t you want to base your financial decisions on an incredibly consistent pattern that has persisted for centuries?
3. If you invest in a diversified portfolio of stocks and bonds you are giving yourself the best chance, statistically, to succeed. Don’t make this more complicated than it is!
Let’s take a look at some more data.
When I ask people, “What do you think about the stock market?” The most common answer is: “Oh, man, I lost a fortune in 2001 and it was even worse in 2008. The stock market is dangerous.”
It’s funny how human beings perceive the world. We naturally remember the bad stuff and edit out the good stuff. I guess we are hard-wired that way.
Yes. The S & P 500 was down 12% in 2001 and 22% in 2002. And yes, the S & P was down 36% in 2008. I don’t want to minimize that.
BUT, what about the other years since 2001? Let’s take out 2001, 2002, and 2008 and look at the other years.
2003 UP 28%
2004 UP 10%
2005 UP 5%
2006 UP 15%
2007 UP 5%
2009 UP 26%
2010 UP 15%
2011 UP 15%
2012 UP 16%
2013 UP 32%
2014 UP 13%
2015 UP 1%
2016 UP 12%
2017 UP 21%
2019 UP 32%
2020 UP 6% (how is that possible is this crazy world?!)
Why doesn’t anyone talk about 2003? Or 2009? Or 2013? Or 2019?
Why do our minds automatically gravitate toward the down years? I don’t know. I’m not a behavioral psychologist.
So next time someone asks you, “What do you think about the stock market?” you need to say, “Man, I made a ton of money in 2003, 2004, 2006, 2009, 2010, 2011, 2012, 2013 and 2014, 2016, 2017, 2018, and 2019.”
People will probably look at you funny.