When Hindsight Isn’t 20/20

by Dmitriy Katsnelson of Bronfman E.L. Rothschild, 4/15/19

“Before, You Are Wise; After, You Are Wise. In Between, You Are Otherwise.” -David Zindell

Most of us are attracted to round numbers. Attentions peak around calendar years and familiar anniversaries that have meaning beyond the numbers themselves. Rarely do we celebrate someone being at a company for 28.14 years or ask about performance over the last 3,147 days, but we do celebrate 20-year reunions and the beginning of a new century. So, for a society fond of round numbers, the opportunity arrived in early March to count and reflect. Ten. In my experience ten is the number kids get most excited about when they learn how to count. For soccer fans, it’s often the number adorned by the team’s top player. It is the base number of our most cherished birthdays, anniversaries, the metric system, indo-arabic numerals, and for some, investment horizons.

It has been ten years since the worst of the Global Economic Crisis and the Great Recession pushed risk assets to the oft-discussed 666 devil’s intra-day low of the S&P 500 on March 9, 2009. During the worst of it, many serious and bright people pondered whether this would be a recession similar to the Great Depression in scope and scale, resulting in prolonged impairment of the economy and capital markets. Luckily, things didn’t get that bad. For economic context, the Great Recession saw unemployment reach 10%, the Great Depression 25%. GDP contracted more than 5% in 2007-2009 compared to falling 25% in the 1930s. Lastly, the stock market fell in excess of 85% in the 1930s, a lot more than 2007-2009.

A quick reminder of where we were:

  • Bear Sterns and Lehman Brothers went bankrupt; US Agencies Fannie and Freddie went under conservatorship (so, they went bankrupt too); automakers and AIG had to be bailed out; liquidity dried up and lending was effectively frozen.
  • With no liquidity, unusual things started to happen. As an example, from August through mid-December of 2008, high yield bonds sold off more than stocks.
  • The S&P 500 fell more than 55% from a high reached in October 2007.
  • International and emerging market stocks were down nearly 60% from the peak.
  • Housing prices fell more than 30%.

Investors solely exposed to the S&P 500 (which we do not advocate, see diversification letter here) would have looked down on their statement on March 9, 2009 to see a 10-year annualized return of negative 4.5% and a cumulative return of negative 37%. To repeat, that’s a loss of more than 1/3 of one’s money over a 10-year period. Starting on March 9, 2009, however, the next 10 years would have generated more than 17% per year, with a cumulative return of near 400%. These are not magic start dates for peaks and troughs by the way. The prior two decades were up 363% and 466%, respectively. This is where price matters. In March 1999, US stocks traded at almost 30x price/earnings. In March 2009, it was near 11x. Today, at 19x, they are right around the average of the last 30 years. And although prices were low at the time, risk-seeking was not popular in 2009. Even as things improved, many never truly got back into the market given the constant bombardment of worrying developments. Below are just a couple of the headlines that may have kept investors away over the past decade that probably should have been ignored.

  • 2009 – GM filed for bankruptcy midway through the year; corporate defaults hit modern era-highs; there were 140 bank failures in the US (more than there were in 2008); inflation concerns awakened due to more than $1 trillion in government stimulus
  • 2010 – BP oil spill; market flash crash; Obamacare; insider selling jumps to record in second half of the year; Greece nears bankruptcy; Arab Spring begins
  • 2011 – S&P downgrades US Government Debt; US stocks fall nearly 20%; Europe goes through a sovereign debt crisis; Occupy Wall Street
  • 2012 – Fiscal cliff; LIBOR probe; Hurricane Sandy; North Korea sends rockets into orbit
  • 2013 – Government shutdown; taper tantrum sends yields higher and stocks lower; Boston Marathon Bombing
  • 2014 – Ebola; Russia enters Ukraine; ISIS
  • 2015 – Chinese stocks halve in just a few months; crude oil tumble continues; Federal Reserve raises rates for the first time since 2006
  • 2016 – First two weeks are the worst ever for US stocks; Brexit; US Election
  • 2017 – Mueller investigation; multiple terrorist attacks across the globe; Hurricane Harvey, Irma and Maria
  • 2018 – Trade wars begin; wildfires, stocks selloff more than 10% three times; most global equities hit bear market territory (i.e. down more than 20% from peak)

Unfortunately, we do not live in a world of perfect hindsight. Even if we did there are questions whether investors would stick with a plan. Several years ago a paper titled, “Even God Would Get Fired as an Active Investor,” showed that clairvoyance was not a guarantee of success. A portfolio long the 5 best stocks and short the 5 worst stocks over a 5-year period handily outperformed the market portfolio. Within that period, however, there were times when the clairvoyant portfolio trailed the S&P 500 by more than 40%. This is why the maxim of “Time in the Market vs. Timing the Market” is so key to our day-to-day conversations with clients.