The Crystal Ball of Context

The advisors at Prosperion don’t make short-term market predictions – you see, we don’t have a “crystal ball”. Like you, we aren’t sure when the next market correction (or major upswing for that matter) is going to happen. But we can say with certainty that one will happen… eventually. The challenge is in dealing with the interim, where emotion can override logic. For these moments, I think it is wise to look back on history, for it provides a context one is unlikely to find in newspapers or on TV. Context is what gives me pause and offers a staunch reminder that we’ve been here before and that this time really isn’t all that different.

Let’s approach this logically, setting aside the emotions of an impending correction for just one moment. Let’s look back 70 years – Why consider 70 years? Well for the typical investor, we believe 70 years is a good timeframe perspective. You see if someone starts their employment career at 25 or 30 years old, and looks out toward their life expectancy of age 100, well that is 70 years. Assuming you begin investing and use your money over your lifetime, that is a 70 year timeframe.

Since 1946 there have been 57 market corrections (defined as a drop in the S&P of 10% or more). On average, one every 15 months.* This is normal.

In that same time period, there have been 11 economic recessions (defined as a decline in US GDP for two consecutive quarters). On average one every 6.5 years. 14% of the time we were in a recession. For the other 86% the economy was growing.* This is normal.

What is abnormal is the sheer volume of opinionated talking heads making their “educated guesses” at what they believe is going to happen. Now unless I missed the crystal ball sale at Best Buy, I can tell you none of these folks know what’s going to happen with any level of certainty. Yet we as a society give them a space on our television or news outlet to share tales of doom and despair. Then we as investors get concerned when everyone on CNBC says to, “SELL SELL SELL” only a day before they change their minds to “BUY BUY BUY”.

Context tells me that this isn’t done to benefit investors, instead it’s to generate advertising revenue to keep media companies in business. Shocking news gets eyeballs, eyeballs create audiences, audiences collect advertising dollars, plain and simple.

You see, context tells me that yes, we may be due for a correction. This market has been trending steadily upward for far longer than our average of 15 months. But this correction is not unusual. If anything it is an opportunity to purchase some of our favorite companies at a discount, like visiting the mall for a sale. Because in all of history, stocks have retreated temporarily, only to eventually go back up. Since 1946 our favorite measure of investment return – dividend growth, went from $0.71 per share to $45 per share, an increase of about 65 fold.** That includes all 57 corrections and 11 recessions. Oh, I forgot to mention the S&P 500 Index that everyone is myopic about, well in 1946 it was at 15 – today, 70 years later it is around 2,400 (160 times higher!)

So as we wait for the inevitable drop in prices (and the inevitable climb in value that will eventually follow) I encourage you to remember the words of investing professional Peter Lynch:

“Far more money has been lost by investors preparing for corrections, or trying to anticipate market corrections than has been lost in corrections themselves.”

Remember that market corrections are temporary. They always have been. History says that wise investors do well to ride out the storm while market timers tend to get washed out with the tide.

We are here to help you. So if you’re feeling concerned contact us. We want to keep you on track and on your plan. To prevent you from making mistakes with your resources. Our goal is to keep you focused on what is best for you. That is our normal.