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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

 

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