After Black Monday in 1987, Vice President George H.W. Bush said “My view is that you don’t just jump out there and make a statement when there is a hurricane raging outside unless you have something intelligent to say.”
Times have changed.
I don’t know when, and the why can literally be a book, but somewhere along the way the American Investor found themselves wrapped in the warm blanket of safety. We live in a world where the Federal Reserve and the Treasury Secretary and financial advisors tell the American investor, “we have your back.”
Back in December, while the stock market was in its deepest drawdown since 2011, Steven Mnuchin told investors that he spoke with leaders of the nation’s largest banks and relayed to the nation that “The CEOs confirmed that they have ample liquidity available for lending to consumer, business markets, and all other market operations.”
Of the three hundred plus million people living in this country, not a single one of them was worried about the banks ability to lend to the consumer and maintain normal market operations. The secretary of the treasury inexplicably yelled fire in a crowded theater.
When the stock market opened on Monday, in a shortened session, the S&P 500 fell 2.71%. And then, for reasons that could not be explained then or now, stocks stopped going down. They gained 5% on Boxing Day, and within a few months had charged 25% higher, making new all-time highs.
Now stocks are 7% off their highs and already the alarm bells are starting to percolate. There is now talk of the Fed cutting interest rates. I am not joking. Apparently a decade of ZIRP, over 100 consecutive months of job growth, a quadrupling of the stock market, and E-scooter alternatives wasn’t enough.
We are walking on eggshells, people.
When children are raised in a culture of safetyism, which teaches them to be “emotionally safe” while protecting them from every imaginable danger, it may set up a feedback loop: kids become more fragile and less resilient, which signals to adults that they need more protection, which then makes them even more fragile and less resilient.
Investors have had a comfortable decade. Sure we had just experienced one of the worst crises of the last century, but since then, it’s been a relatively smooth ride, all things considered. And so what’s happened to the psyche of the American Investor is similar to what’s happened to American children writ large: “We adapt to our new and improved circumstances and then lower the bar for what we count as intolerable levels of discomfort and risk. By the standards of our great-grandparents, nearly all of us are coddled.”
Our great-grandparents lived in different times. Stock market returns weren’t promised, nor were they delivered. From 1900-1944 the Dow grew just under 2% per year. From 1945 to today it compounded at 6.8% a year (both numbers are price only). The first half of the twentieth century was rife with bank runs, depressions, hardly any financial regulation, and World Wars. The second half certainly had some discomfort, but it feels like we arrived at a point where extraordinary attempts are being made to shield investors from further discomfort. Trying to eliminate dangers could potentially make investors more sensitive and more fragile to ordinary adversity that exists in all risk markets.
I’m not saying that people should put 100% of their portfolio in index funds and hold on come hell or high water. What I am saying that it’s time for the American investor to abandon their safe space. There are risks to investing. There always have and there always will be. Bear markets happen. Recessions are a natural part of the business cycle. They will happen, and we will get stronger as a result of it. Trying to ban their existence is infantile.
John Roberts, Chief Justice of the United States, gave a commencement speech at his son’s middle school graduation ceremony that is absolutely perfect. This is exactly how I think about the experience of the American Investor.
From time to time in the years to come, I hope you will be treated unfairly, so that you will come to know the value of justice. I hope that you will suffer betrayal because that will teach you the importance of loyalty. Sorry to say, but I hope you will be lonely from time to time so that you don’t take friends for granted. I wish you bad luck, again, from time to time so that you will be conscious of the role of chance in life and understand that your success is not completely deserved and that the failure of others is not completely deserved either. And when you lose, as you will from time to time, I hope every now and then, your opponent will gloat over your failure. It is a way for you to understand the importance of sportsmanship. I hope you’ll be ignored so you know the importance of listening to others, and I hope you will have just enough pain to learn compassion. Whether I wish these things or not, they’re going to happen. And whether you benefit from them or not will depend upon your ability to see the message in your misfortunes.