Are these the 'good old days?'

“I wish there was a way to know you’re in the good old days before you’ve actually left them.” - Andy Bernard, 'The Office'. 

In early 2022, I got a lot of 'what do you think about the market right now?' questions from clients, friends, and neighbors. CNN’s ‘fear index’ says we are all in extreme fear. I don’t know about that, but maybe it's time to reflect. 

Flip to the end for my take on the situation so far in 2022, but first some perspective: News is written by humans. They have a profit incentive to write headlines and articles that appeal to us emotionally. Here is a research article from Niessner (Wharton) and So (MIT Sloan) from 2018 that shows a negative financial news story is 22% more likely to be covered in mainstream financial press. 

Interestingly, they and Fang/Peress in 2009 found that buying stocks that were not covered in the press was a (slightly) profitable strategy. You can (theoretically) pick good stocks by investing in the ones that aren't in the papers! (Don't use that strategy to trade, it's too difficult to execute but it is interesting.) 

There is lots of good journalism out there but as a whole, the impression you are likely to get will be negative. One thing I see all the time is they report bear markets based on the price of the index, but not including dividends. See more about that below. 

That's not to say things are always great. Some of the news in 2022 was simply horrific. Russia is doing the unthinkable invading Ukraine, the pandemic wrecked lives and global supply chains, inflation is rising, inequality is worse, climate change threatens, and political polarization threatens democracy. Even with recent losses, the stock market is still very highly priced compared to long term averages.    

Still, the reason those negative headlines appeal to us is, in part, that humans have a bias to fear the future. That’s probably a good thing that has kept our species alive! Quite a bit of research shows that when we overcome adversity, our perspective changes about the event. We get stronger and happier.   

The future always feels uncertain and scary, and if we look to the past for comparative experience, the bias tells us 'it's worse now than ever.' Here’s a chart of the Google search trend for ‘worse now than ever’. It’s high, but not abnormally high, and this only goes back to 2004. 

I'm a Gen X, Cold War kid, and I can tell you that it was pretty terrifying growing up with arms escalation, global proxy wars, Soviet instability, AIDS and homophobia, casual racism, crack, inner-city strife, trickle-down economics, and the Reagan revolution. The murder rate per capita in 1980 was twice what it is today. Global extreme poverty was around 30% or more in 1975, and is around 10% today. 

Ok enough with the Pollyanna perspective. I am not apologizing or dismissing the many problems we have and make as a society. We need change. 

Here’s my take on 2022.   

If, in February of 2020, just as reports of a new virus were emerging from China, you invested $10,000 in the S&P 500 and reinvested your dividends you would still have about $13,000 today.    

What happened in between was pandemic-caused rapid social disruption, a fiscal and monetary stimulus on a scale we have never seen, and a once every 15-20 year excitement over profitless technology companies (and cryptocurrencies.)  It caused a lot of inflation that we now have to deal with, but modern central banks know how to lower inflation pretty well, in fact raising inflation has been harder!   

In other words, this was going to happen. Your stocks and bonds were going to skyrocket with the stimulus (and investor over-enthusiasm) and come back down as everything tapered off.   

Yes, the Federal Reserve and Congress are out of ammunition, but consumer and corporate coffers are very healthy. You are likely still in a good place compared to before. (This time is very hard on those trying to retire, especially anyone that made the decision in January. More on that in another blog.)   

Will the Federal Reserve orchestrate a ‘smooth landing’ where we taper inflation and avoid tipping into a recession? NO! It can’t be because nothing ever feels smooth in the present.   

But in hindsight, this will feel like the good old days.