There seems to be so much uncertainty these days, between ongoing impeachment hearings (if it ever makes it to the Senate) and now the escalation and tension with Iran, never mind threats of “Christmas presents” from North Korea. These seem to be some scary and unstable times.
Added into this uncertainty is the above average growth that most of you have seen over the past year in your investments. 2019 was a great year that saw the S&P 500 (500 largest US companies) up 31%, MSCI World Index (outside of the US) up 22%, and the Barclays US Aggregate Bond index was up 9%.
With the big gains it can be human nature to want to sell all the investments and wait for the market to drop or at least get some more certainty in the world. While that may make you feel better, there is real risk to doing that. This would be called “market timing”. The hard part of “timing the market” is that you must be right twice. You need to know where the top is and where the bottom is. For example, if you sell now and the market drops 10%, do you get back in? What if it drops 20%? Vice versa – say the market goes up 10%. Do you get back in? If it drops 10% from there, what do you do?
A recent study by DALBAR, a financial research firm, has shown how the general temptation for investors to try and time the stock market often results in the investor diving into the market at the top and fleeing at the bottom.
This activity has caused investor results to significantly lag the broader markets over the long haul. The charts below illustrate that, rather than following trends during market highs and lows, investors may be better served by staying invested during all stages of the market. 1
Impeachment and the Markets
We have seen 3 presidential impeachment attempts in the US. The first impeachment attempt in the US came in 1868. President Johnson, who took office after the assassination of President Lincoln, was charged with violating the Tenure of Office Act (since it was so long ago, this impeachment attempt and its effects on the market will not be addressed). The next two were more recent, with President Clinton and President Nixon. The findings show that the market returns were more based on economics and not the presidential impeachment attempts. 2
War and the markets
The relationship between geopolitical crises and market outcomes isn't as simple as it seems. Since history seems to repeat itself, let’s look back at some of the US wars and their effect. 3 In the six months following the onset of World War I in 1914, the Dow fell more than 30%.
Because the war basically ground the business world to a halt and market liquidity all but dried up, the decision was made to close the stock market that year. This lasted for six months, the longest such period on record. Making up for lost time, the Dow rose more than 88% in 1915 after it reopened, which remains the highest annual return on record for the DJIA. In fact, from the start of the war in 1914 until the war ended in late 1918, the Dow was up more than 43% in total or around 8.7% annually.
World War II had a similarly counterintuitive market outcome. Hitler invaded Poland on September 1, 1939, setting off the war. When the market opened on September 5, the Dow shot almost 10% higher that day. When the attack on the U.S. naval base at Pearl Harbor occurred in early December 1941, stocks opened up the following Monday down 2.9%, but it took just a month to regain those losses. From the start of WWII in 1939 until it ended in late 1945, the Dow was up a total of 50%, more than 7% per year.
The Korean War began in the summer of 1950 when North Korea invaded the South. That conflict ended in the summer of 1953. In that time, the Dow was up an annualized 16%, or almost 60% in total.
U.S. troops were sent to Vietnam in March of 1965. The Dow would finish the remainder of that year up almost 10%. By the time the last of the U.S. troops were pulled out of Vietnam in 1973, the stock market was up a total of almost 43% in that time, or just under 5% per year.
The U.S. invaded Iraq in March 2003. Stocks rose 2.3% the following day and finished up the year with a gain of more than 30% from that point on. Although it is important to note these gains were coming off the brutal 2000-2002 bear market.
The point here is the market's reaction to presidential impeachments, war and geopolitical crises can be counterintuitive. There is no clear-cut rationale as what the stock market will do, which is why it is in your best interest to sit tight and not let your emotions get the best of you.
Please note that the Investment Committee and New England Capital is always looking for ways to tweak the portfolio models and add value where we can. One of our “philosophies” is to find investments that do well in up markets, but also try to hold value in down markets. Although your portfolios are not immune to market downturns, please know that we are working hard to try to preserve as much as we can on the downside, while getting some market returns on the upside. As always, please feel free to call us or email us with any questions or concerns you may have.
1 DALBAR investing study, Capital Group, A buy-and-hold strategy can serve investors well, 2019