From the lows in early 2009, it has been up, up and away for Wall Street. The market has not suffered a decline of 20% (the Bear market definition) in over nine years. However, this market has not been loved. Stock prices have risen less on an annual basis than the average Bull Market and many investors today are worried about Washington politics or an imminent economic and market crash. This market has been “climbing a wall of worry” as the pundits like to say.
“A cat that sits on a hot stove will not do so again. She will also not sit on a cold stove.” This is a good analogy of how people are affected by severe economic contractions. The Crash of 1929, and the subsequent Depression, was such a painful experience that survivors never again trusted the stock market or an uninsured bank deposit. It was thought that another Depression would never happen until all those who suffered were gone. This is basically what has happened. But those of us born in the 1940s and after did not know what a Depression looked like.
At least not until the tech stock crash of 2000 and the housing crash of 2008. The tech crash was the milder event, mostly affecting investors and Wall Street. It did not affect Main Street as much. The economy recovered quickly, and with low interest rates and easy access to credit, the housing market boomed.
The subsequent housing collapse was the big event. Incomes, careers and homes were lost in the millions. The pain was not only severe but long lasting. Take a look at the chart below. Investors have not returned to stocks in a big way even though prices are up sharply. And corporations have been defensive also. They have used borrowed money to fund stock buybacks and ‘manufacture’ earnings through a reduced share count rather than taking the riskier strategy of investing aggressively in new businesses and products. Risk aversion is the new mantra for many.
Millennials who saw their parents and grandparents suffer in 2008 have been especially wary of stocks. This is a shame. Stocks are volatile, but over longer periods of time, corporate earnings go up and stock prices follow in lockstep. Millennials need a long-term investment strategy and this should not be based on market timing or sitting on the sidelines (see chart below). Use the market to your advantage. Worry less about the next Bear market.
