Skip to main content

Sound Advice: March 16, 2022

Pullback . . . and then what? 

The one certainty about the stock market is well illustrated by an account of a 1955 story about J. Pierpont Morgan given by the U.S. Secretary of the Treasury George M. Humphrey.

The story is as follows:

Somebody said: ‘Mr. Morgan, you are familiar with the stock market.?’ He said: ‘Yes.’ They said: ‘You know quite a lot about it?’  And he said: ‘Yes, I do.’

They said: ‘Do you think you can tell us what the stock market will do?’  He said: ‘Yes, I can.’  They said: ‘That is very interesting.  Will you please do so?’  He said: ‘Yes. It will fluctuate.’

Equally on point is a quotation from Benjamin Graham, widely known as the father of value investing and co-author with David Dodd of the recognized text on Security Analysis:

“Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble . . . to give way to hope, fear, and greed.”

What comes along with inevitable fluctuation is a long-term advance of considerable magnitude.  As recently as 1980, the S&P 500 Index was below 100.  Today, even after the recent pullback, that index is more than 40 times higher.

Since 1950, a period of 72 years, there have been 36 drops of 10% of more. Two-thirds of those took place within the calendar year.  Six months later, on average, the index rebounded by 23%.  There was only one exception – 1990 – when the S&P index was essentially unchanged half a year later.

The average of those slippages over the seven-decade-plus period was 20.2%, which means nearly all of the deficits had been erased by the subsequent recoveries.  Worst of all was the plunge of 56.8% during the banking crisis of 2008-2009, when the S&P Index hit a bottom of 676.53, but a bit more than two years later it had more than doubled.

It's tempting to believe that it’s really different this time, but history tells us quite clearly that it’s not.

N. Russell Wayne, CFP

 

Comments

Post a Comment

Popular posts from this blog

Sound Advice: January 3, 2025

2025 Market Forecasts: Stupidity Taken To An Extreme   If you know anything about stock market performance, you can only gag at the nonsense “esteemed forecasters” are now putting forth about the prospective path of stocks in the year ahead.   Our cousins in the UK would call this rubbish.   I would not be as kind. Leading the Ship of Fools is the forecast from the Chief Investment Strategist at Oppenheimer who is looking for a year-end 2025 level for the Standard & Poor’s Index of 7,100, a whopping 21% increase from the most recent standing.   Indeed, most of these folks are looking for double-digit gains.   Only two expect stocks to weaken. In the last 30 years, the market has risen by more than 20% only 15 times.   The exceptional span during that time was 1996-1999, which accounted for four of those jumps.   What followed in 2000 through 2002 was the polar opposite: 2000:      -9.1% 2001:     -11.9% ...
Post a Comment
Read more

Sound Advice: March 10, 2021

The ABCs of Stock Picking After decades of analyzing stocks (and funds) and investing for clients, I'm happy to share in plain English what's involved, what works, and what doesn't.  Keep in mind the reality that successful stock picking is an effort to maintain a good batting average. In baseball, a batting average of .300 or better is considered quite good.  With stock picking, you need to do better than .600, which means you have many more winners than losers. No one gets it right all of the time.  It's not even close.  Wall Street shops all have their recommended lists and the financial media regularly hawk 10 stocks to buy now. Following that road usually is a direct route to disaster.  Don't be tempted. Let's begin with the big picture: The stock market goes up and down over time, but the long-term trend is up.  When there's a rally under way, everyone feels like a genius.  When the market hits an air pocket, though, with few exception...
Post a Comment
Read more

Sound Advice: June 17, 2020

Rock and a Hard Place Regardless of your age, impressions from childhood linger.  As the first days of summer approach, we all remember the feeling that accompanied the end of a school year.  Yet as much as many of us would like to believe we again have the summertime freedom to do as we wish, the reality is quite the opposite. Although months of confinement and limitations on social interaction have increased our personal discomfort and severely impacted the business community, our current situation is not analogous to the end of any school year.  It’s quite the opposite. There is every reason to continue wearing face masks, social distancing, and avoiding close contact with others.  Nothing suggests that we can modify our behavior significantly or resume patterns of daily living we enjoyed only a few months ago. There are no meaningful advances in medical treatments.  At best, there are attempts to combine different approaches...
Post a Comment
Read more