What a Long Strange Trip It’s Been
Wall Street worries are abundant these days and we suspect much of the problem is that investors have been spoiled with much higher-than-average market returns for a long time. That era may be coming to an end, which means we need to adjust our thought process.
Since the subprime housing debacle in 2008, financial markets have been juiced by the Federal Reserve money printing (QE, or quantitative easing) and/or very accommodative fiscal policy (i.e. deficit spending). These policies have served to not only keep the US economic boat afloat, but to insulate our economy from economic downturns. Yes, 2008 was a huge downturn, but we actually recovered quite quickly in light of the severity of the decline. In 2020, we had a steep, one month recession caused by COVID, but it was quickly off to the races for markets, and markets have shown little sign of slowing down… until now.
The chart below came across our desk this week, which shows returns for rolling 15-year periods beginning in 1970 (e.g. Jan. 1970-Dec. 1985; Jan 1971-Dec 1986, etc.) The last 15 years (the dark line) have been the best ever recorded
It is no accident that the period begins shortly after the market trough following the subprime housing crisis. Certainly, this was aided by the fact that the market began this period at a relatively low level, but over 15 years, there had to be something to sustain the strength of that bull market over a long period of time. That something would be the impact of many years of QE following the subprime crisis, immediately followed by massive deficit spending during the pandemic and continuing to today. What a long, strange trip it’s been.
We are not arguing whether these policies were needed or not, the fact is that they served to consistently prop up the market like it has rarely been propped before. At some point, all that excess liquidity has to end. You can only print so many dollars before you weaken the dollar to ‘just another currency’. In the first 5 months of this fiscal year, through February, another $1.15 trillion was added to the national debt. The Trump administration appears hell bent on reducing that fiscal stimulus and deficit spending in a meaningful way and spurring economic growth in the private sector to offset the impact of reduced government spending.
In a CNBC interview last Friday, Treasury Secretary Scott Bessent said “Could we be seeing that this economy that we inherited starting to roll a bit? Sure. And look, there’s going to be a natural adjustment as we move away from public spending to private spending. The market and the economy have just become hooked. We’ve become addicted to this government spending, and there’s going to be a detox period.”
Our point is that after the incredible market run for the last 15 years, taking a breather here should not be causing such agita. The market is only slightly below the level it was immediately before the euphoric and unrealistic rally after Trump was elected. If the market had just gone sideways for the last few months, would you feel as concerned as we suspect you feel now? Probably not.
The fact is that the market has been up 20%+ two years in a row*. Making it three in a row is a very big ask. That’s not to say it can’t be done, but if the federal money spigot is being turned off, or at least dialed down, it’s hard to envision 2025 being another great year for the stock market. The fundamental indications, the technical indications and the economic indications would imply that this is a year of consolidation.
Thus far, we view the market retreat as orderly, but it has felt much worse because the previously high-flying tech stocks have performed the worst. The chart below shows the magnitude of the recent decline relative to other declines since 1945. All things considered, it has not been an especially impressive decline. There has been no panic and that is the way we’d like to stay. If we can do that, we will soon be set up for the next leg forward.
We are staunch believers in building and adhering to a long-term investment plan and avoiding emotional responses to short-term bouts of market volatility such as the recent market decline. Research clearly shows spontaneous human emotional reactions to such short-term volatility have been proven detrimental to investors wealth accumulation.
Relax and try to have a great week!
- https://www.macrotrends.net/2526/sp-500-historical-annual-returns
What We’re Reading
Ultra-processed foods may increase risk of depression
Life Expectancy vs. Health expenditures
Treasury Sec’y Bessent says a ‘detox’ period for the economy does not have to be a recession
Which US States Import The Most From Canada And Mexico?
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The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.
The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
Past performance is no guarantee of future returns.
By: Adam
