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Large-cap U.S. stocks, as measured by the S&P 500, have dominated in both absolute and risk-adjusted terms. They are soaring. It’s the Roaring ’20s again!
The stratospheric rise of these stocks continues in 2024. Their 15% year-to-date return is 32% annualized. Inflation fears are fueling investments in U.S. stocks, precious metals, and commodities. Every day that the stock market reaches new highs is a day when the likelihood of a burst increases.
As evidenced by target-date fund performance, high-risk portfolios are being rewarded with high returns this year. Choose your risk and investment horizon to evaluate your own YTD portfolio performance.
Diversification “has not worked,” many believe. After all, holding anything other than large-cap U.S. stocks has detracted from performance. But diversification smooths out the ride, with higher lows and lower highs.
The New Roaring ’20s
The 2022 setback may have been a warning, according to this article:
While the crash of 1929 curtailed economic activity, its impact faded within a few months, and by the fall of 1930 economic recovery appeared imminent. Then, problems in another portion of the financial system turned what may have been a short, sharp recession into our nation’s longest, deepest depression.
From the stock market crash of 1929, economists – including the leaders of the Federal Reserve – learned at least two lessons.
First, central banks – like the Federal Reserve – should be careful when acting in response to equity markets. Detecting and deflating financial bubbles is difficult. Using monetary policy to restrain investors’ exuberance may have broad, unintended, and undesirable consequences.
Second, when stock market crashes occur, their damage can be contained by following the playbook developed by the Federal Reserve Bank of New York in the fall of 1929.
These lessons should be taken to heart. The 2020s are almost half over, but similarities to the 1920s are emerging as shown in the following graphic. Some say the next crash could be worse than the Crash of 1929.
Baby Boomer Warning
My recent article entitled Revenge of the Baby Boomers went viral on Seeking Alpha with 70,000 readers, so many of you know that I am very concerned for my fellow boomers. If you are a boomer, be worried — at least for now.
Unlike the 1920s, the 2020s has 75 million baby boomers who are in the “retirement risk zone” when investment losses can ruin the rest of their life. Boomers cannot afford a Great Depression in the 2020s. Their loss will also be their heirs’ loss. They need to move to safety until they are beyond the risk zone (in the 2030s).
Most baby boomers are not aware of the risk they are facing, especially those who have defaulted their investment decision in their 401(k) plan to their employer. Baby boomers are not protected in most target date funds (the most popular default investment), so they need to know their risk exposure, and move out if they are not protected.
Baby boomers will be angry—and shocked — if they are harmed by a stock market crash. Employers should be wary of that anger.
Conclusion
Euphoria characterized the Roaring 1920s. Lots of fun! One hundred years later, we have artificial intelligence, flat-screen TVs, watches with video communications, and lots more. But stock markets still have cycles. This current cycle is the longest that has not experienced a serious decline.
Some are sounding alarms, but most are seeking the next market highs. Remember that if something cannot go on forever, it will end. And this time the "end" stands to devastate a very large group of nice older people.
Ron Surz is president of Target Date Solutions, developer of the patented Safe Landing Glide Path and Soteria personalized target date accounts. He is also co-host of the Baby Boomer Investing Show. Surz’s passion is helping his fellow baby boomers at this critical time in their lives when they are relying on their lifetime savings to support a retirement with dignity, so he wrote a book, “Baby Boomer Investing in the Perilous 2020s,” and he provides a financial educational curriculum.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
