ETF Store Insight

10 Years Older, but 10 Years Wiser

January 14th, 2020 by Nathan Geraci

The 2010s marked the first decade since immediately prior to the Civil War that the U.S. economy didn’t suffer at least one recession.  The S&P 500 went the entire decade without experiencing a single 20% drawdown, or bear market.  That hasn’t happened in 120 years!

These facts are made even more remarkable when you consider the events of the past ten years:  Greek bailout, U.S. debt downgrade, European sovereign debt crisis, “fiscal cliff”, Cyprus banking crisis, “taper tantrum”, Ebola virus, Syria, Chinese currency devaluation, Brexit, 2016 U.S. Presidential election, trade war, yield curve inversion – to name a few (or a lot)!  Despite plenty of terrifying headlines, a resilient US economy and stock market pushed ahead.

Perhaps it’s fitting we begin the 2020s with yet another scary headline (Iran) and stocks barely flinching.  The market continues showing an uncanny ability to brush aside unsettling news and march higher.  So, where does that leave us?  What might the next decade hold?

Nobody knows for sure, but there are two important takeaways from the previous decade that may help shape a successful investment approach in this new decade:

1)  Investors who overreact are rarely rewarded.  If the 2010s taught us anything, it’s that there is always another alarming headline around the corner.  Headlines that taunt.  Headlines that tempt.  They make every effort to derail your sound investment plan.  This isn’t new, of course.  Investors have always found reasons to sell stocks – politics, wars, economic data.  The difference now is that news is 24/7 and instantaneous.  It’s immediately accessible on the supercomputers we carry in our pockets.  The world knew about Iran’s missile strikes nearly as quickly as the Pentagon did.  This creates a desire to do something, anything in your portfolio!

Add to that, many investors experienced the pain of the dotcom bubble and/or global financial crisis.  There is still a feeling that any one event might be the straw that breaks the camel’s back.  No investor wants to repeat the agony of 2008-2009.  But we are now 11+ years removed from that dreadful experience.  The economy and markets have withstood the negative headlines.  Investors who overreacted during the past decade paid a price.  Headlines will come and go, but how you handle them is what matters.

2)  The 2010s were an anomaly.  While investing is best approached with an optimistic mindset, a pragmatic viewpoint is also helpful.  The fact is the 2010s were an anomaly, sidestepping both a recession and bear market.  With history as our guide, we should expect a recession in the 2020s.  We should also expect a bear market at some point this decade.  That doesn’t mean history should be feared, however.  Investors who are mindful of history can approach the markets with a sense of optimism and realism, the most powerful combination in investing.  It’s having faith in the longer-term success of the global economy, while realizing there will be bumps along the way.

The key is to not conflate these two takeaways.  Some might say, “the 2010s were an anomaly, which is why the negative headlines didn’t matter”.  The problem with that thinking is, again, there have always been negative headlines.  The markets have always bounced back.  With Iran in the news, consider the stock market reaction to past geopolitical events:

Source:  LPL Financial Research

 

On average, stocks lost 5% and recovered that loss within 47 days.  Imagine having bailed on stocks after the Ronald Reagan shooting in 1981 or Iraq invasion in 1990, in the midst of one of the great bull market runs of all-time.  That doesn’t mean world events can’t impact financial markets, even for more prolonged periods of time.  They most certainly can and do… but not typically in predictable ways.  How many investors expected a positive stock market less than one year removed from the attack on Pearl Harbor?

As we say goodbye to the 2010s and welcome in the 2020s, we’ll leave you with this:  we are all (unfortunately) 10 years older.  Given the past decade and what history may suggest about the forthcoming decade, now is an excellent time to take inventory of where you are at.  What are your financial goals?  What’s most important to your future?  We are here to help.