While most of us are trying to wrap our heads around the volatile economic and market environment that we find ourselves in, the biggest challenge in my mind is in trying to keep a balanced perspective on current realities versus the fear mongering being played out in the popular press. Very few are devoting any effort to trying to put this current downturn into a broader historical perspective. The media, as we have come to expect, is capitalizing on the prevailing fear with all the talk about the next Great Depression. Fear is not only a powerful motivator; it is a great tool for selling advertising space. Nobody buys a newspaper with the headline "All is Well".
I thought the attached article (Click Here for Article) provided a bit of this much needed historical perspective. It could have easily been written last month but was actually written in November of 1974. While the author could not have known for sure that the 1973-74 bear market was drawing to a close, he simply drew comparisons to the final days of the 1942 bear market to provide some context.
Clearly no two historical events are repeated in the exact same format, and therefore the cause of every bear market is different than the next. But the human emotions and characteristics around all bear markets are the same. Sound logic and fundamental long-term reasoning always take a backseat to despair, doubt, fear and short-term thinking in the latter stages of a downturn. While many appreciate (including yours truly) that there are opportunities of a lifetime currently available for the brave, the fear of additional short term losses keeps money on the sidelines. And while it is difficult to see any catalyst for an imminent market upswing (just like in November of 1974 or April of 1942), bear markets eventually end even in the face of continued negative news.
It is encouraging to hear that the US has actually been in recession for the last year. Usually, by the time a recession is declared, we are well on our way out of it. I am also encouraged to see the “crowded” trade is the one based on fear. The current yield on the 10 Year US Treasury bond is down to 2.7%. At the depths of the last bear market, the yield on the 10 Year got down to 3% as investors crowded into the perceived safety of a piece of paper that guaranteed a return of 3% per year for 10 years before taxes and inflation. When the psychology finally broke, those left holding those 10 Year bonds did not feel so safe when prices plunged as yields backed up to well over 4% within months.
One closing thought. The last 10 years have been dreadful for equity investors. This is only the 3rd time in the last 110 years that US equities returned less than US bonds over a 10 year timeframe. While that is truly a miserable statistic, it should provide some hope for the coming years. Investing is about looking forward, not backward. In 1942, in the middle of WW2, investors stopped thinking about the prior decade’s miserable returns and started looking forward. At some point, perhaps sooner than later, markets will start looking out more than one day at a time, the current risk aversion will recede, and markets will “return to reality”.