Same Ol’ Wall of Worry
The tragedy in Orlando last Saturday has shaken the nation while rekindling policy debates on gun control, immigration, and terrorism. These issues are among many cited by the pessimists as
catalysts for the end of the bull market in stocks. But the odds are that they’re likely wrong, and here’s why.
The coming weeks bring us the Federal Reserve meeting on interest rates and Britain’s vote on exiting the European Union. And as my colleague Kyle Kersting recently noted, the U.S. presidential election adds regular headlines that jolt markets higher and lower. The problem, however, isn’t the actual risk any of these topics pose, but rather how we feel about such risks.
Consider this: We all look back at the late 1990s as one of the greatest bull markets in history. During the last 5 years of the 20th century, stocks returned over 21% per year and investors often grin while thinking about how easy it was to make money. But that’s not entirely what happened. Few investors recall the proverbial “wall of worry” stocks had to climb during that time:
- In 1998, the bailout of hedge fund Long Term Capital Management was the largest ever seen at that time, with 16 of the world’s largest banks providing nearly $4 billion at the unprecedented direction of the Federal Reserve
- In 1999, stock markets around the world grappled with the launch of a brand new global currency — the Euro
- There were terrorist attacks both at home (1995, Oklahoma City bombing) and overseas (2000, bombing of the U.S.S. Cole in Yemen)
- As the year 2000 approached, doomsdayers predicted Armageddon from global computer failures due to the Y2K coding issue
- The S&P 500 saw 4 short-term drops of 10% or more between 1996 and 1998, including a 22% selloff from July through September of 1998
- Heck, we even endured the impeachment of President Bill Clinton in 1998 (and subsequent acquittal in 1999)
Today, we’re in the 7th year of the current secular bull market that has also climbed wall of worry while generating 17% annualized returns. But we see one very big difference between the late 1990s and today. The 1990s boom included record levels of optimism, while investors today are downright pessimistic.
We end by quoting famed investor Bill Miller, and we couldn’t have articulated our point any better: “Great investors are not unemotional, but are inversely emotional – they get worried when the market is up and feel good when everyone is worried.” Investors with a disciplined process that manages emotions have, well, a lot less to worry about.