At this week’s Bygone Relics show: The markets do continue their rally! So, we will never have a bad day? C Thomas responds with data.
“After 1929, so many people had been traumatized by the stock market crash that there was a lost generation.” historical writer Ron ChernowVacation is over and so for the last two weeks we have discussed Lionel Messi and his suffering and his ability to overcome suffering. Why you might ask? Sometimes you have used a connection to teach a lesson and I could have used the buffalo Bills, but that would have only appealed to the atheists. There are two reasons, 1) I like Leo Messi and I like his story, but 2) to learn about how hard things can be and how to always keep trying even if you quit and have to restart and fail again and try again. Messi went through that ugly cycle only to come out on top. Why do I bring this up? You probably know by now that I believe in cycles: I believe in expansions and contractions and the 50 year storm in Bell’s Beach Australia. Let’s look at a chart of the stock market going back the last 100 years. I’ll have Austerity attach it in the show notes. We are in the midst of the largest wealth creation boom in history. The stock market has gone up and up for the last 40 years. But like I always say, let’s check our history.
First I want to point out something before you read the chart. Charts are for nerds like Austerity and I, and the one we attached is from Macro trends, they do great work and if you want to dig a little deeper into this, I would check them out. They are produced with certain characteristics that you need to understand. The scale of a chart is very important. Let’s say the y-axis (vertical line) of a chart is what we are measuring in this case the level of the Dow Jones Industrial Index and the x- axis (horizontal line) is time. The Dow Jones is the oldest representative index of the state of the economy and is just a measuring stick. There are better ones nowadays, but this will do for our purposes. So the chart starts lower left and rises to the top right. The default is inflation adjusted, because we know the dollar has lost a lot of its value over the last 50 years after we went off the gold standard, but let’s let the chartist do it work. The other default is that they are produced in log-scale. I will keep it simple and tell you that let’s say the chart is 5 inches tall on the y-axis. Each inch is how long it takes the Dow Jones to double. From 2,500 to 5,000 is one inch, then from 5k to 10k is another inch, and from 10 to 20 and from 20 to 40. This shows that the index has doubled, a 100% gain, and it flattens out the chart for visual clarity by reducing the importance of nominal numbers. In essence a thousand-point drop from 10,000 is much more meaningful than a 1,000 point drop from 38,000, and it is. However, this assumes a market that is increasing, and it has for the last 40 years in an almost nonstop advance into the friendly skies of Icarus. Let’s unclick the log scale option of the chart.
Boom! For those listeners on the podcast let me paint the picture. The entire vertical advance of the chart is in the last 20% of the x-axis. It almost looks flat and then it goes almost parabolic. Small hiccups in the early 2000’s, during the GFC, and during covid but the mighty market just broke back to new highs very quickly. In July of 1982, the chart shows we were at 2,530 and now we are at almost 35,000. Lazy people will say duh C Thomas, the market always goes up just invest and wait and you will see 7-8 % returns. Everyone knows this except you. This is a true statement, but I’m not investing for 100 years. I’ll be dead by then. I hope to have another good 30 years left in me. Let’s look at 30 year variations.
In 1929, the stock market fervor was at its peak. F. Scott Fitzgerald was describing affluence in great detail in The Great Gatsby and great it was, and then the world was not so great. In Aug of 1929, if you were fully invested in the market and using the biggest companies, the Dow Jones 30, as your barometer your holdings would have peaked at 6700 and dropped to 961 by June of 1932. You would have lost 85% of your wealth in less than 3 years. Not even Leo Messi suffered like that. He plays a game and is extremely rich. America plunged into the Great Depression, and investors wouldn’t see their portfolios break even again until 1959. 30 years is what it took for their holdings to get back to inflation adjusted break even. We have talked about thought exercises for a while now and you can guess what this week will be. 30 years and your stocks return zero. Zip. Zilch. Nada.
Let’s look at one more time period:
By the mid-1960s the stock market had been going up seemingly forever, the Beatles had arrived in America and young girls were screaming over Ringo, the drive-in movie theater was the place to be and about half of America was under the age of 18. Religion is waning, the movie theater industry peaked in 1964, and the sexy summer of 1969 is right around the corner. A funny thing happened amongst all those good times though. In December of 1965, the Dow Jones hit 9300, a number it wouldn’t hit again until July of 1995. That’s right, it was another 30 years before the stock market got back to even. The markets sold off to 2553 in Jun of 1982. A 73% drop over 17 years so I again ask you, what would your portfolio look like if your portfolio declined 73% in the next 17 years? Would you still be on track for retirement? How do you think the Vanguard retirement date 2040 index will look then? During this time America went off the gold standard, oil prices spiked, lines at the gas pumps formed because there was an oil shortage, and two massive recessions followed a decade of stagflation. Suffering? You bet your ass, there was suffering.
In 1950, 98% of men aged 25 to 34 worked while just 34% of the women worked outside the home. By 1980, 95% of men aged 25 to 34 worked but now 66% of women had to work to support their families. The slack was picked up by women working and bringing home a pay check to allow the same standard of living. Today, you ask? 87 percent of men work but 81% of women work in the 25 to 34 age brackets. The family has no more slack to pick up. A home that once required one breadwinner now requires two and don’t forget that the families are smaller today than then as well. In 1965 the average children per woman in America was over 3.5 and that dropped to below 2 by 1980. Think of it this way, less children and most families now had double income and the stock market still managed to decline for 17 years. There isn’t a third parent that can enter the workforce to help out today…
“Alas, in 1929 came the stock market crash and everything changed and became worrisome. People started practicing conservatism because of financial losses, myself included.” Silent film star Pola NegriIt took 30 years from 1965 to take out that stock market high which it did in 1995. That makes two 30-year periods in the last 100 years that would have ruined any investor’s plans of retirement. It would have destroyed pensions with their required 7% rate of return needed to pay what was promised. If you click and drag on the charts you can zoom into these charts and look at more detail of the history of these markets. This is a lot of important activity for it to be just flattened into a log scale chart to pretend as if it never happened due to a trick of a chartist. It’s actually not a trick, most chartists want to be positive and tell the positive part of the story. The suffering happened and then it will pass, and that is what we can learn from Messi, but that doesn’t mean it didn’t happen. People, their plans and their businesses were destroyed shortly after never ending exuberance was all the rage. Where do you think we are in the business cycle now?
Sincerely Yours,
C Thomas Printer
On this date in history
43 years ago to be exact, the Summer Olympics opened in Moscow. 60 countries boycotted the games and refused to attend because of the Soviet Union’s invasion of Afghanistan. Do you understand why we are studying cycles?
This week’s thought exercise
Rather than being naïve to history, what would you do for your retirement if your investments yielded zero for the next 30 years? Let’s not be pessimistic and say that they decline, although that is a possibility, let’s just say that they remain flat.
Also born on this date
American businessman and inventor of the first practical revolver, Samuel Colt.
Resources