The Long View

The expression, “it’s different this time,” has crept its way back into the public dialogue over the last couple years. It’s hard to argue with the sentiment. Today, things are different. Interest rates are steadily rising off historical lows, the yield curve has been flattening and threatening inversion, tensions with North Korea are high, the U.S. and China are teetering on a trade war, and after a 22-month period of calm, the stock market has returned to a more normal state of volatility.

It’s enough to drive skittish investors to cash. But history has shown time and again that short-term surprises and geopolitical turmoil are the rule not the exception. They are noise to the long-term investor. In other words, it almost always feels different this time (see adjacent table), and the biggest mistakes often occur when emotional reactions overrule rational analytical decision-making. As Peter Lynch said, “Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.”

Take, for example, the Arab Oil Embargo in the early to mid ‘70s. Interest rates were in the high teens, oil prices had quadrupled, the Middle East was in turmoil, and people could only buy gas on certain days based on the last digit of their license plates. Times were tenuous at best. Many people were probably not inclined to add money to their stock investments or even remain in the market at all because things felt different. However, for those investors who had a long-term time horizon, even these events could be considered noise.

In September of 1974, near the height of the embargo, the value of the S&P 500 was 68. On Friday, May 18th, 2018, the S&P 500 closed at 2,713. That’s a 3,890% return. In other words, $100,000 would have turned into $3.989 million. No too shabby.

The point is – long-term optimists tend to make money.

Over time, innovation, free markets, and capitalism have prevailed. But humans are wired to be loss averse; so many investors overreact or respond emotionally when losses appear on paper. A simple way to fight this tendency is to understand the typical size and frequency of stock market losses in the past.

The chart below shows calendar year returns of the S&P 500 index (the bars) along with its largest intra-year declines (the red dots) from 1980 to present.

As you can see, since 1980, the S&P 500 has dropped 14% on average during the course of a calendar year and has declined more than 28% five times (including one decline of 49%). Those are sizable, temporary losses in value. BUT, “temporary” is the key word. Over that same time frame, the S&P 500 returned more than 11% each year on average and ended in positive territory 29 of 38 calendar years.

The truth is that stock investors are certain to experience investment loss, but over time they are increasingly likely to make money. According to the Oppenheimer chart to the right, from 1926-2016, the 1-year returns of the S&P 500 have been positive 75% of the time, the 5-year returns have been positive 87% of the time and the 15-year returns 99.8% of the time.

It is important to note that we are not advocating for putting blinders on and simply wishing your way through tough markets. Instead, we are offering a reminder that volatility is to be expected in stocks over the short term, and that many things that feel scary or different now, may be reduced to distant, forgotten noise in the long run.

Rest assured that we continue to assess the state of the market, the economy and the investments that you own. We will rotate, re-allocate and reposition assets as necessary given our robust research efforts.

In our next piece we will provide our thoughts on where we are in this market and economic cycle, and potential asset

allocation moves.

Clay is the Chief Strategy Officer for Alpha Omega. Clay has more than 21 years of experience in the financial services industry. For feedback or questions regarding this blog post, please contact Clay at


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