Where Were You 50 Years Ago?

October 2023 marks the 50^th anniversary of one of the most tumultuous months in American history. Do you recall the events of October 1973?

• October 6, 1973 – On Yom Kippur, the most sacred day in the Jewish calendar, Arab states led by Egypt and Syria and supported by the Soviet Union launched an all-out war to exterminate Israel. This developed into the proxy war between the US and the Soviet Union.
• October 10 – The Watergate investigation shifted to the White House. Then Vice President Agnew walked into a federal courthouse and pled no contest to felony tax evasion (bribes), thereby resigning from office.
• October 19 – Arab OPEC members embargoed oil exports to the US, driving long lines and skyrocketing prices for gasoline. By the time the embargo ended in March of 1974, oil prices had jumped four-fold, and an energy-induced inflation was roaring.
• October 20 – Under a Watergate investigation subpoena, President Nixon ordered Attorney General Richardson to fire Special Prosecutor Archibald Cox, but Richardson refused and resigned. The deputy attorney general was given the same instructions but also refused and was fired. Finally, Solicitor General Bork executed the order, which set off a national firestorm of rage. This constitutional crisis engulfed our country for the next 10 months.
• October 25 – America awoke to the news that during the previous night, the US military and its nuclear forces had been placed on a global alert level of DEFCON 3, signaling the Soviet Union that they best not escalate matters further in the Middle East.

From the beginning of 1973 to the market’s bottom during the fall of 1974, the S&P 500 endured a roughly 48% decline. This drop, from 120 to 62, was reasonably justified; a lot of bad stuff was happening!

But remember, headline news doesn’t dictate long-term investment success. As humans, our nature is one of correlation. When we see one thing happen, we associate it with another. For example, we see terrible news, and we assume that the market must be reacting. But as statisticians remind us, correlation is not causation. Just because two things appear related doesn’t mean one is causing the other. Yes, the short-term price of a business may fluctuate based on the news du jour, but does that same news affect the value of the business? Does bad news influence that business’s ability to innovate, sell, and grow?

In the short run, market prices are influenced by investor emotion and human nature. Over the last 100 years, single-year fluctuations have ranged from a 54% gain to a 43% loss. Humans see this statistic and respond in one of two ways: Either they get sick from the roller coaster of volatility and sell everything to make it stop, or think they can outsmart the market by timing their investments. Neither approach proves successful long term.

At any time, the markets can dramatically shift one way or another. Instead of reacting, investors should continue to progress steadily toward their goals. The grind of simply saving and investing regularly, while ignoring the backdrop of news, yields the greatest outcomes. Returning to our previous example, the bottom of 1974 was swiftly forgotten as the market recovered over the following months. Midway through 1975, the S&P stood at 95, a near 50% gain from the bottom. By July of 1980, the market had fully recovered, and a full-fledged bull market emerged shortly thereafter.

History is littered with similar examples. A 1973 high school graduate would remember several: the crash of 1987, the Gulf War, the Y2K scare, 9-11, the dot-com bubble, the global financial crises, COVID, etc. In each event, we experienced broad market declines in excess of 20%, typically with swift returns to positive growth.

Do you remember what some of those events felt like? Perhaps you felt the stress of the moment and the gnawing feeling that this time, something is different. Hopefully you ignored that emotion and stuck to your financial plan. Those who did were rewarded; those who didn’t ultimately had to work harder and save more to make up for their losses.

So here we are in 2023, 50 years after that fateful month. We find ourselves in an eerily familiar position. Inflation is rampant, energy prices are rising, turmoil in the middle east, and politicians embroiled in trials. History may not repeat itself, but it sure rhymes with the past. How are you reacting to today’s events?

Even with no known facts about the future, you can work around human nature and stay focused on your plan. With time, today’s conflicts will resolve. In the meantime, perspective is everything. Do what you can to avoid a fearful reaction (turn off the TV or mute the news notifications on your phone.) Continue to invest in great businesses that provide goods and services — companies that are incentivized to continuously improve, create jobs and careers, remain profitable, and reward owner shareholders with growing dividends over a long time. Optimism is a perspective and a choice, and it’s yours for the taking. What will you choose?