Some historical perspective on the current market meltdown

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by DamnTheAdmiralty

I’ve been investing since some of you kid’s were in diapers; through the Russian debt crisis/LTCM bailout, Y2K, .Com bust, 9/11, Mortgage Meltdown and now COVID. The market is doing what the market does and will go back to doing what we are all used to it doing. Every single bear market/recession is followed by a bull market and every single bull market is ended by a catalyst that “everyone saw coming”.

To Put COVID in perspective, “the market” has survived

  • Panics of 1857, 1869, 1873, 1893
  • Switch from the gold standard
  • Civil War
  • Wall Street Bombing of 1920
  • Great Depression
  • WW1, WW2
  • Vietnam and the Oil Crisis
  • 1987 Crash
  • Savings and Loan crisis

Despite all of that, the real (inflation adjusted) return on equities for the measurable ~200 year history of the market has average 7% (source is Jeremy Seigle “stocks for the long run” page 12).

We have industries today that one would not be able to fathom 100 years ago, let alone 200 years ago when we were an agrarian dominated slave holding society. Along the way entire industries have been created, then wiped out, then built again. In the short term market dips are always painful, in the long run, as long as you have a piece of that broad market you will be rewarded well.

Lets look at the 1929 crash and resulting great depression – had you invested at the peak

  • It took 25 years for the DOW to regain it’s peak – but re-investing dividends would have made you whole in 7 years.
  • reinvesting and accounting for inflation (deflation) and you are made whole in 5 years.

Mind you 1929 was the worst the US has ever seen and is likely to ever see. Will things get as bad/worse as they were in 1929? Probably not

  • Monetary policy (The Fed) is an accepted practice.
  • Social Insurance (un-eployement, ssi, etc) means we won’t see roving hordes of poor people raiding food supplies.

Hold up – you don’t understand. COVID is a pandemic like none other; people will die, industry will be decimate, blah, blah blah. Lets look at the two worst case scenarios; Germany and Japan during WW2

  • Germany – 90% drop in real equity prices, followed by a 30% per year return for the next 12 years
  • Japan – 98% drop in real equity, breakup of industrial cartels and distribution of shares to workers, followed by a 10.4% avg annual real return.

COVID is not a conquering army, My thoughts on what is likely to happen.

  • Market will bleed 30% to 50% of it’s peak – if we go past 50% its time to beg/borrow/steal and go all in.
  • We will see a net decline of jobs which will be cushioned by a shift in demand. Amazon is hiring 100k people (and bitch all you want, they pay better than many of the mom and pops that are folding). Any one in the medical field/retail grocery is having a bonanza,
  • un-employment and other social insurance will kick in and there will not be an economic tsunami caused by the retail/hospitality workers being unable to pay rent/bills.
  • Manufacturing will see a resurgence both in short/long term. GM is already angling to make respirators. Companies that can adapt will do so and thrive. Companies that go bankrupt were likely on the edge well before this. Also this should be the canary in the coal mine for the US to wake up and on-shore it’s critical industries.

My advice for you kids

  • Set aside an emergency fund (3-6mo exp)
  • Invest in broad market indexes and may it automatic via payroll or monthly deductions. This ensures you never invest at a market peak and will avoid any worst case scenario.
  • set saving goals (house/car/etc) and understand asset allocation and what your risk tolerance is
  • For folks nearing retirement, understand that retirement is a continuum. One does not retire and need 100% of their savings in cash. On the contrary, you have 20+ years for those assets to continue to work for you.
  • Understand and heed the yield curve.

Closing thoughts; this is normal and something I am viewing as a buying opportunity. To quote two investment legends, you really have two options.

  • “Stay the course” – John Bogle
  • “Be Fearful when others are greedy, greedy when others are fearful” – Warren Buffet

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