January 2024
Staying Invested
Throughout history there have been many times where it seemed prudent to exit the market. Today there is no shortage of bad headlines and reasons not to invest. The optimal action for long-term investors has always been to stay invested. While selloffs can be quite painful, the act of timing the market necessitates two correct decisions: when to exit the market and when to re-enter. In this post, we will look at some events over the past few decades when the prevailing sentiment was to sell or exit the market.
One event was The Savings and Loan Crisis that started in the late 1980s and led to a recession in 1990 which lasted eight months. Approximately one-third of all savings and loan institutions failed from 1985 to 1995. These S&Ls were established as financial institutions to accept savings deposits from customers and make consumer loans to their members as well. While inflation in the late 1970s rose rapidly, the Federal Reserve raised its lending rate to banks (called the discount rate) from 9 ½ to 12% in late 1979. At the time, S&Ls had many long-term loans outstanding at far lower fixed rates, and when borrowing rates increased the S&Ls could not attract adequate capital from the savings accounts of their members. Attempts to attract more deposits by offering higher interest rates led to liabilities that could not be covered by the lower interest rates at which they had loaned money. This resulted in about one third of all S&Ls becoming insolvent, as many of them had pursued highly speculative investment strategies to make up the shortfall. Since 1990, the S&P 500 total return was approximately 1,290% or 8% annualized.
The 2008 Housing Crisis started in December 2007 and lasted until June 2009. This was a time of great concern, as lenders of subprime mortgages began to shut down. Despite the Federal Reserve Board’s attempt to calm the waters by drastically lowering interest rates (eventually to an historic 0%), further dismay came in March 2008 with the collapse of Bear Stearns, a major investor in subprime mortgages, followed by the closure of IndyMac, a major mortgage lender, and finally the bankruptcy of Lehman Brothers. The Dow dropped to its lowest level of the Recession in March 2009, a historic drop of over 50% from its all-time high set in October 2007. Since December 2007, the S&P 500 total return was approximately 230% or 7.7% annualized.
More recently, in early 2020, the Covid crisis struck the globe. The pandemic was a global healthcare crisis. The market sold off aggressively starting that February, eventually bottoming on March 23rd. At the time, there was no shortage of financial news outlets reporting the stock market selloff. Many investment industry experts were urging viewers to move to cash. Despite this, by August of that year the US stock market had recovered from the March losses. Ultimately, S&P 500 gained just over 18% for the year, quite a robust annual investment gain. Since February 2020, the S&P 500 total return was 51% or 10.9% annualized.
In closing, there have been countless times throughout history when it seemed smart to sell and exit the market. Below is a list of many of those events. Despite all this, the US stock market continues to prevail. In late January 2024, the S&P 500 hit new all-time highs for the first time in over two years. Looking ahead, we are optimistic the US stock market will continue to prevail. There will be event-driven selloffs, which can be emotionally painful, but the smart move historically has been to stay invested in great American businesses. And that is our plan.
Note: Past performance is not a guarantee of future results
Reasons To Not Invest
1986 Space Shuttle Disaster and Meltdown of Chernobyl
1987 Black Monday Stock Market Crash
1988 Pan Am Bombed over Lockerbie, Scotland
1989 Savings and Loan Crisis
1990 Persian Gulf War
1991 Collapse of the Soviet Union
1992 Los Angeles Riots
1993 World Trade Center Bombing
1994 Orange County, CA Bankruptcy Filing
1995 Oklahoma City Bombing
1996 U.S. Budget Crisis and Government Shutdown
1997 Avian Bird Flu
1998 Russian Financial Crisis
1999 Y2K
2000 Dot Com Bubble Burst
2001 September 11th Attacks
2002 WorldCom Collapse
2003 Iraq War
2004 War on Terror Continues
2005 Hurricane Katrina
2006 U.S. Home Ownership Begins to Fall
2007 Housing Crisis
2008 The Great Recession
2009 Stock Market Collapse
2010 U.S. Poverty Rate Hits 15-year High
2011 Japan Earthquake and Tsunami
2012 Hurricane Sandy and The Fiscal Cliff
2013 U.S. Government Shutdown
2014 Oil Prices Collapse
2015 China Economic Slowdown
2016 Brexit
2017 U.S Political Theatre
2018 Trade War
2019 Presidential Impeachment
2020 Covid-19 and U.S. Election
2021 Supply Chain Slowdown
2022 Inflation
2023 Interest Rates
2024 ?