Back to Normal Doesn’t Feel Like Normal

We all thought that 2020 would go down as the craziest, most unpredictable year of our lives.  It probably was.  But after the Covid-19 vaccines were released in early 2021, many of us expected and were looking forward to a return to normal.  As it turned out, the most unpredictable year of 2020 led us right into the weirdest year of 2021.  A world which, in some ways, resembled the good old days of 2019 and in many other ways felt like the twilight zone.  May I offer a few examples?

As predicted by most public health officials, the rollout of the Covid-19 vaccines led to an immediate drop in cases, hospitalizations, and deaths.  It looked like the pandemic was coming to an abrupt end in June here in the US until the Delta variant showed up in other countries and made its way here.  Late summer and early fall have seen another wave of cases, hospitalizations and deaths that are now in decline.  The end of the pandemic has been postponed.

We also learned this year that the global economy doesn’t work like a light switch that can be turned off and then back on instantly.  The global supply chain is working its way back to where it once was.  However, this transitory period we find ourselves in has been quite unusual with supply shortages for all kinds of products.  Consumers have grown accustomed to waiting six months for new furniture.  Shortages of computer chips for automobiles have limited the number of new vehicles rolling off the assembly line which, in turn, has led to very high demand and prices for used cars.

The “Zoom Boom” has made a major impact on certain communities that are seeing an increase in people moving to their cities while maintaining their employment in another city.  In smaller towns, this influx of new arrivals has created a lot of growing pains.

Around the country, many real estate markets have seen their largest increase in home values in decades.  The combination of historically low interest rates, cash on hand for down payments, and a shortage of housing inventories at a time when we’ve been staying home more has thrown the housing market into a brave new world.

In the investment markets, the stock market has cooled off slightly in the past quarter but still remains much higher than the high water set just before the pandemic.  With historically high values of stocks relative to earnings, some investors are wondering if the short-term future of stocks will be bleak.  While there are no facts about the future, the long-term historical record has shown that patient and disciplined investors have been able to capture the long-term averages of investment markets. 

Let’s look back 50 years to 1971.  That year, the earnings of the S&P 500 were $5.57.  The cash dividend was $3.16.  The index ended the year at 102.  The current consensus estimate for earnings this year is $190, while the cash dividend is on track to finish around $60.  At the end of September, the S&P 500 closed at 4,308.  To summarize, in fifty years the earnings of the 500 largest US companies are up about 34 times, the dividend is up 19 times, and the index itself is up 42 times.  Meanwhile, inflation is up 6.6 times over the same period.

However, those fifty years had plenty of opportunities to be anxious with new technologies, assets bubbles and recessions.  From January of 1973 and October of 1974, the S&P 500 index declined 48%.  Between March of 2000 and October 2002, the index was down 49%.  Then, between October 2007 and March 2009, the same index fell 57%, the largest decline since the great depression.

Despite these huge setbacks, the market recovered every time to reach new highs.  All one had to do to rake in these fabulous returns was to invest in stocks and stay invested in stocks no matter what the conditions were.  It’s a great recipe for beating inflation and meeting our long-term goals.  Patient and disciplined investors were rewarded for sticking to their long-term plan. They didn’t interrupt the compounding returns of their portfolios.

In unsettling or just plain odd times like these, it can be easy to predict declines that may or may not be just around the corner.  If, and when, we do see a drop in stocks and our investment accounts, the concept of thinking long-term or not panicking may not calm us down.  Perhaps the idea of not interrupting the compounding will stick.  There is a lot of great compounding ahead of us.  We just need to get out of the way.