Category Archives: Dow Jones Industrial Average

The Good Times Keep Rolling

By Larry Luxenberg  

For investors, they say, hope springs eternal and never more so than with the promise of a new year and new beginnings. As 2019 began, though, investors were worried mightily. While stock market returns for the year, as measured by the S&P 500, were only down 4 percent, the fall and winter was dreadful and investors were afraid.

Those fear are now long forgotten after a powerful and steady rally that lifted the market by 31.49 percent, the 18th best year on record in the last century.

But given that 2019 was such a great year, shouldn’t we just be grateful, pack our cards away and sit out 2020. This seems especially prudent given the rising tensions with Iran.

Based on the historical record, these fears are just as unwarranted as the ones a year ago. Nothing in the stock market record guarantees a good year (or for that matter, guarantees anything) but the historical record suggests that on average, investors would be well served by continuing their commitments to the stock market.

We have good stock market records since 1926. Of the 94 years that encompasses, we’ve had 18 years as good or better than last year. Of the 17 times before last year, the average return has been a gain of 11.67 percent. That’s close to the average gain of 12.09 percent for all 94 years.

It’s true that 6 of those 17 years have had negative returns but only one of those years, 1937, in the midst of the Great Depression, had a return worse than a 10 percent loss. In 1937 the S&P 500 declined by 1937 after some failed policy moves including premature austerity. In three of the years, losses were under 5 percent. In the remaining two years, the losses were a little over 8 percent.

What’s more, in fully 7 of the years gains were over 20 percent and in three of the follow up years, the gains were over 30 percent. In short, the good times kept rolling.

Investors are always inclined to be fearful and to be cute about moving money in and out of the stock market. But based on the modern historical record, they’ve do well to emulate Rip Van Winkle, take a snooze instead of action, and they are more likely than not to be pleased with the result.

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Nothing to Fear

By Larry Luxenberg  

In the midst of the Great Depression, Franklin Roosevelt  addressed the fear that was paralyzing America. In his first inaugural address, Roosevelt said that “We have nothing to fear but fear itself.”

There actually was a lot to fear. The economy was in terrible shape, people were dying and lives were ruined. But action was needed and fear got in the way of taking steps to improve people’s prospects.

Often, in less dramatic ways, I find investors’ fears preventing them from taking prudent risks that would improve the lives of themselves and their families.

The fear of a small loss prevents them from seeking a big gain. Even the near certainty of a large loss over several decades prevents them from taking action that has the high probability of generating at least some gain and most likely a big gain.

People have been so programmed about what is “conservative” investing that they aren’t open to taking a rational look at the data and adjusting their investments accordingly.

While Roosevelt has long since been consigned to the history books, the shadow of the Great Depression and the subsequent stock market crash still looms large in investors’ psyches.

We will regularly see large drops in the stock market and inevitably a crash from time to time but that is something to plan for, not something to relegate us to the sidelines forever.

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The Patriots Are Not the Greatest

By Larry Luxenberg  

The New England Patriots may very well be the greatest pro football dynasty of all time but one area where they don’t excel is in their impact on the stock market.

A Super Bowl Indicator developed decades ago holds that if an American Football Conference team wins the Super Bowl, the stock market will decline that calendar year. If a National Football Conference team or former NFL team, wins, the stock market will go up.

Despite this indicator having no actual basis in anything that should influence investor behavior or actual stock market returns, it has been surprisingly accurate in the half century since the first Super Bowl. In fact, it’s worked nearly 80 percent of the time or 4 out of 5 years. You’ll be hard pressed to find a more accurate stock market indicator.

As an AFC team, the Pats are bad for the stock market. But they have also been bad for the indicator, accounting for nearly half of the misses. Overall, though, the Pats haven’t busted the indicator but they have been mediocre for the market. In the five times before this year that the Pats won the Super Bowl, the market has gone up four times. But the one year it went down, 2002, lowered the overall average return to +3.38 for the S&P 500. While that’s a positive return, it’s still less than half of the S&P’s average return of 10 percent over the close to century for which we have accurate returns.

Surprisingly, in the years when the Pats lost, the market has averaged an even lower return of +2.01 percent. Two years have really hurt their returns. In 2008, when the Pats lost to the Giants by 17-14 in Arizona, the market dropped 37 percent. In a wining Pats year, 2002, the market dropped 22.1 percent after the Pats beat the then St. Louis Rams 20-17.

Excluding the two big losing years, the market has returned an above average 11.05 in the eight other years the Pats have appeared in the big game.

The conclusion for this year: the market is already off to a good start but may go up or down for reasons that are far removed from Brady and Belichick. While all of this may seem overly whimsical when big money and people’s lives are at stake, most American market participants do take their pro football seriously. And while there is no reason to assign any cause and effect to the Super Bowl Indicator, people move billions of dollars every day on flimsier evidence than this.

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A Great Casino

By Larry Luxenberg  

After one of the worst endings to a year in stock market history, it’s easy to despair and bash the market. When the stock market is collapsing, it’s hard to take the long view and be optimistic. But if you do, you’ll soon realize that the U.S. stock market is generally a friend to investors.

We have good data on the U.S. stock market since 1926. For those 92 years, including 2018, the stock market has been negative for a calendar year only 25 times. That’s using the Standard and Poor’s 500 as a measure for the stock market and including dividends. Of those 25 negative years, 15 years, including 2018, had losses of 10 percent or less. In 6 of those years, the market declined by less than 5 percent. In only 3 of the 92 years has the S&P declined by 30 percent or more. Only 4 times has the market declined for a second consecutive year.

The 4 bad times — with two or more consecutive years of losses — were during the Great Depression (1929 to 1932), the start of World War II (1939-41), the deep recession in the 70s after the Arab Oil Embargo and Watergate (1973-74) and the recession and tech collapse around 9/11 (2000 to 2002).

Other than those 4 times, the broad market has never had two or more straight declines. Of the 92 years, we’ve had 67 positive years or 73 percent of the time.

Following the most recent financial crisis, in 2009, after the Great Recession, the year started terribly, down more than 20 percent in the first few months but ended up by 26.5 percent. In 1987 following the crash that included the single worst day in U.S. stock market history, the market closed the year up by 5.2 percent.

Most people think of the stock market as a casino. But if you are a long-term investor, over the last century, you are the house and 3 out of 4 years, you are a winner, often by a large amount. I like those odds. Over the course of my 36 year investment career, the Dow Jones Industrial Average has gone from 800 to more than 23,000 as of year-end 2018. If you ask me, that’s a great casino and no cause for alarm just because of the recent unpleasantness.

 

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Good News for Investors

By Larry Luxenberg  

Recently, economic columnist Robert Samuelson wrote a column explaining why so many ordinary Americans perceive their situations as terrible despite what is frequently described as a great economy with record low unemployment.

His argument is that these workers are comparing their situations — lack of raises. a struggle to support their families and to get ahead — with that of a recent golden era. Samuelson maintains that the previous golden era was the result of unrepeatable forces.

This may not seem like good news for investors but their fortunes are not closely tied to workers. The long sluggish recovery that has lasted nearly 10 years is better for investors than the boom/bust of earlier, more robust recoveries with stronger growth but more frequent recessions. Often, what’s good for workers is also good for investors but not always and this may be one of those cases.

What economists at Pimco have termed “The New Normal” may leave workers pining for a bygone era but investors may applaud. Investors have been fretting that the Great Bull Market that began in August, 1982 and carried the Dow Jones Industrial Average to 10,000 in the late 1990s before resuming in March, 2009, may be nearing its end.

Instead, despite trade wars and unraveling of international alliances and general disquiet and upheavel, the long-term picture for investors might remain bright.https://wapo.st/2mClCV4?tid=ss_mail&utm_term=.5a152b7d96be

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The U.K. Returns to Being an Island

By Larry Luxenberg  

Last week we had the referendum heard round the world. Voters in the United Kingdom turned their backs on the Continent after 43 years.

Investors worldwide were fearful and fled equities in droves. In two days the Dow Jones Industrial Average fell 871 points.

And then a strange thing happened. Investors decided that perhaps the sky was not falling after all. Counting a one day run up before the vote, in just four trading days, the Dow had nearly returned to its level of the week before. By the fifth day, it was actually 100 points higher.

This is yet another lesson that investors should not react rashly to emotional events. In the short run, markets are highly unpredictable. Study after study going back a century has shown that investors are likely to hurt themselves by quickly reacting to events and trading emotionally.

The research firm Dalbar has shown that current investors receive about one-third of the return of the mutual funds they invest in because they make ill-timed moves in and out.

It feels uncomfortable to sit there and do nothing while the world is falling apart. But do it anyway. Your wallet will thank you.

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