Often, media and pundits tell us things are just “too scary,” the news too bad, the world too dangerous for stocks to rise. (More on how to better interpret media in Chapter 16.) Yet the world has always faced risks. Investors may say, “Yes, but that was then, and I always knew those past scary times would work out ok. But this time it’s different.”
First, as discussed elsewhere in this book, folks always think this time it’s different. But it’s never so very different as folks fear. This is why Sir John Templeton famously said, “The four most expensive words in the English language are, ‘This time, it’s different.’”
Among the jumble of evolutionary responses that helped humanity long ago but making investing tougher now: Humans evolved to forget past pain, fast. It was a survival instinct! We may think we were cool as cucumbers when faced with past fears, but the reality is, we very often weren’t.
Think we’ve had a rough few years recently? A major Japanese earthquake and tsunami and nuclear accident. Heightened Middle East tensions. Contentious politics. But are politics truly more contentious now? Political rhetoric has always been heated—anyone who tells you we’re more divided now doesn’t know a shred of US history. Political infighting is a constant. (And if you think US politics are heated, you should watch a UK parliamentary session. Heck, in 2012, a male Greek politician punched a female political rival in the face on live TV.)
Tensions have been flaring in the Middle East not just since Israel became a nation, but for all its history. (In 1801, the US Marines were dispatched to what’s now Libya to protect shipping lines from terrorists—the Barbary pirates.) And the world has been plagued by natural disasters since, well, the Big Bang. There’s no evidence natural disasters are increasing in frequency or ferociousness.
Some folks like to claim even the weather is getting more severe and unpredictable for whatever reason, making hurricanes more fierce and such. Which doesn’t explain why the 1900 Galveston hurricane was the deadliest to ever make landfall on the US—and the second costliest based on inflation-adjusted dollars. Of the top 10 strongest US land-falling hurricanes, all but 2 were prior to 1970.1 The most active decade for hurricanes since we’ve been recording (in 1851) was the 1940s, with 24, followed by the 1880s with 22, and the 1890s and 1910s with 21 each.2
Why does that matter? Simply, folks inflate current events in their mind and misremember past events. Think geopolitics are tense now? What about for all of the Cold War? Or during the Cuban Missile Crisis, when missiles were actually aimed at our beds a short boat-ride away from Florida? Think debt is high now? It was well over 100% of GDP in World War II’s aftermath. Remember Chernobyl? That accident put Japan’s much better contained one in 2011 to shame. In the US, we’ve seen long periods of food rationing and gas rationing—not just in response to short-lived natural disasters. We’ve been hit on our own soil in Hawaii, New York and DC and had embassies attacked overseas (not just in 2012, but multiple times before). We’ve had oil shocks, strikes, recessions, riots, hyperinflation, deflation. Accounting scandals. Impeachments. Homegrown terror attacks on our own soil.
Yet, look at Exhibit 15.1 which shows notable events for each year back to 1934 and annual global stock returns. Through it all, stocks have overall risen. Yes, bear markets occur, but no US or global bear market has ever been predicated by a natural disaster. Outside of the start of World War II in Europe, geopolitical tensions—even outright major terror attacks and the start of hot wars—have had a fleeting, and not necessarily negative, impact on stocks.
Exhibit 15.1 Never a Dull Moment
Sources: Global Financial Data, Inc., as of 08/28/2012; Thomson Reuters. Returns from 1970 to 2011 reflect the Morgan Stanley Capital International (MSCI) World Index, which measures the performance of selected stocks in 24 developed countries and is presented inclusive of dividends and withholding taxes. Returns prior to 1970 are provided by Global Financial Data, Inc., and simulate how a world index, inclusive of dividends, would have performed had it been calculated back to 1934.
| Year | Events | Stock Returns |
| 1934 | Massive Wall Street reforms passed; National Recovery Act price controls; Hitler declares himself Führer | 2.55% |
| 1935 | Italy invades Africa; Hitler rejects Versailles treaty; Dust Bowl; Social Security Act; NRA overturned | 22.78% |
| 1936 | Hitler occupies Rhineland; Nazi appeasement; Spanish Civil War; Top US tax bracket hits 79% | 19.28% |
| 1937 | Short but sharp US recession; Capital spending & industrial production drop; Japan invades China | −16.95% |
| 1938 | Nazis annex Austria and invade Czechoslovakia; New England hit by major hurricane | 5.61% |
| 1939 | Germany & Italy sign military pact; Britain, France and Poland ally; Poland invaded, beginning World War II | −1.44% |
| 1940 | France falls to Hitler; Battle of Britain; Top US income tax bracket over 81%; Wall Street regulations passed | 3.53% |
| 1941 | Pearl Harbor; Germany invades USSR; US declares war on Japan, Italy & Germany | 18.74% |
| 1942 | Wartime price controls; Battle of Midway; Top US income tax bracket 88% | 1.19% |
| 1943 | US Meat & Cheese rationed; Price & wage controls; Major U-boat attacks; Fed. deficit exceeds 30% of US GDP | 19.89% |
| 1944 | Consumer goods shortages; Allies invade Normandy; Top US income tax bracket hits record 94% | −10.24% |
| 1945 | Postwar recession predicted; Invasion of Iwo Jima; FDR dies; Atom bomb dropped in Japan | 11.03% |
| 1946 | US net debt exceeds 100% of GDP; Employment Act of 1946 passed; Steel & shipyard workers strike | −15.12% |
| 1947 | Cold War; High US inflation; Israel/Palestine debate swirls; Indo-Pakistani War; Communists take Hungary | 3.20% |
| 1948 | Berlin blockade; US seizes railroads to avert strike; Israel independence, immediately invaded; US recession | −5.73% |
| 1949 | Russia explodes atom bomb; Britain devalues the pound; Communists control China; Taiwan/China tensions | 5.42% |
| 1950 | Korean War; McCarthy and the “Red Scare”; China invades Tibet; Global population exceeds 2.5 billion | 25.48% |
| 1951 | Excess Profits Tax; Rosenberg trial; Korean War continues; US tests H-bomb; Marshall Plan ends | 22.45% |
| 1952 | US seizes steel mills to avert strike; Egyptian revolution; Jordanian coup; America’s polio scare hits a high | 15.82% |
| 1953 | Europe hit by North Sea floods; Russia explodes H-bomb; Tecession; Stalin dies; Korean War ends | 4.84% |
| 1954 | Dow 300—fear of heights; Taiwan/China conflict; French-Indochina War; Brown v. Board integration debate | 49.82% |
| 1955 | Eisenhower illness; Warsaw Pact formed; North Vietnam invades South; US 7th Fleet aids Taiwan’s army | 24.74% |
| 1956 | Suez Crisis—Israel and Egypt fight; Asian flu; Hungarian Revolution crushed by Soviets | 6.58% |
| 1957 | Russia launches Sputnik; Recession; Little Rock Central High integration crisis; Eisenhower suffers stroke | −6.02% |
| 1958 | Recession; Taiwan/China conflict; Marines dispatched to Beirut; Khrushchev attempts to unify control of Berlin | 34.46% |
| 1959 | Castro seizes power in Cuba; US steel strikes; Cuban-backed revolt in Dominican Republic fails | 23.30% |
| 1960 | Recession; Russia downs U-2 spy plane; Castro nationalizes foreign property; Global population over 3 billion | 3.49% |
| 1961 | Berlin Wall erected; Green Berets sent to Vietnam; Bay of Pigs invasion fails; Freedom Riders—civil rights | 20.78% |
| 1962 | Cuban Missile Crisis; JFK cracks down on steel prices, Cuba embargo; China/India fight | −6.21% |
| 1963 | President Kennedy assassinated; South Vietnam government overthrown; Integration/segregation debates intensify | 15.38% |
| 1964 | Gulf of Tonkin; Race riots; Brazil coup d’état; Segregation abolished; Khrushchev deposed | 11.25% |
| 1965 | Civil rights marches; Regular US troops in Vietnam; India-Pakistan war; Major blackout in Northeast US affecting 30 million | 9.83% |
| 1966 | Vietnam War escalates; Nigerian coup; Chinese Cultural Revolution begins | −10.12% |
| 1967 | US race riots; British Parliament votes to nationalize 90% of steel industry; Six-Day War | 21.28% |
| 1968 | USS Pueblo seized; Tet Offensive; Martin Luther King & RFK assassinated; Soviets quash Prague Spring | 13.94% |
| 1969 | US recession; Prime rate at record high; N. Korea downs US navy plane; Ghadafi takes Libya | −3.86% |
| 1970 | US invades Cambodia; Bankruptcy of Penn Central; Aussie Poseidon bubble bursts; Kent State shootings | −3.08% |
| 1971 | Wage & price freezes; Bretton-Woods era ends, gold standard abolished; US dollar devalued | 18.36% |
| 1972 | US mines Vietnamese ports; Israeli athletes murdered at Munich Olympics; Iraq nationalizes oil companies | 22.48% |
| 1973 | Energy crisis—Arab oil embargo; US recession begins; Watergate scandal; Agnew resigns; Yom Kippur War | −15.24% |
| 1974 | Steepest market drop in four decades; Nixon resigns; Yen devalued; Franklin National Bank collapses | −25.47% |
| 1975 | NYC bankrupt; North Vietnam wins war; UK nationalizes automaker; Spanish dictator Francisco Franco dies | 32.80% |
| 1976 | OPEC raises oil prices; US government takes over many private railroads; Lebanese Civil War | 13.40% |
| 1977 | Social Security taxes raised; Spanish neo-fascists attack during political assembly; NYC blackout | 0.68% |
| 1978 | Rising interest rates; US net debt crosses $600 billion, double 1970s level; Cleveland, Ohio defaults | 16.52% |
| 1979 | CPI inflation spikes; Three Mile Island nuclear disaster; Iran seizes US embassy; USSR invades Afghanistan | 10.95% |
| 1980 | All-time-high interest rates; Love Canal; Iran-Iraq War; Chrysler bailout; Silver crash | 25.67% |
| 1981 | Steep recession begins; Reagan shot; Energy bubble bursts; AIDS identified for first time; Israel bombs Iraqi nuclear facility | −4.79% |
| 1982 | Worst recession in 40 years—profits plummet; Unemployment spikes; Falklands War; US embargoes Libyan oil | 9.71% |
| 1983 | US invades Grenada; US embassy in Beirut bombed; WPPSS biggest muni-bond default ever; US net debt hits $1 trillion | 21.93% |
| 1984 | Then-record federal deficit; FDIC bails out Continental Illinois; AT&T monopoly broken up; Persian Gulf Tanker Wars; Union Carbide Bhopal leak | 4.72% |
| 1985 | Arms race; Ohio banks closed to stop run; US is largest debtor nation; Net debt hits $1.5 trillion—double 1980 level | 40.56% |
| 1986 | US bombs Libya; Boesky pleads guilty to insider trading; Challenger explodes; Chernobyl | 41.89% |
| 1987 | Record-setting single-day market decline; Iran-Contra investigation blames Reagan; World population hits 5 billion | 16.16% |
| 1988 | First Republic Bank fails; Noriega indicted by US; Pan Am 103 bombing; UK’s “Big Bang” financial market reforms | 23.29% |
| 1989 | Tiananmen Square; SF earthquake; US troops deploy in Panama; Exxon Valdez spill; S&L crisis—over 500 banks fail, RTC formed | 16.61% |
| 1990 | Recession; Consumer confidence plummets; Iraq invades Kuwait—tensions rise; German reunification fears | −17.02% |
| 1991 | US begins air war in Iraq; Unemployment rises to 7%; Irish terrorists attack 10 Downing Street; USSR collapses | 18.28% |
| 1992 | Hurricane Andrew devastates Florida; Riots in LA; Recession fears; Bitter election contest | −5.23% |
| 1993 | Tax increase; World Trade Center bombed; European doubledip recession; British pound devalued | 22.50% |
| 1994 | Attempted nationalized health care; Mexican peso crisis; Former Yugoslavia descends into civil war; Kim II Sung dies | 5.08% |
| 1995 | Weak dollar panic; Clinton bails out Mexico; Aum Shinrikyo sarin gas attacks in Japan; Oklahoma City bombing | 20.72% |
| 1996 | Fears of inflation; Whitewater investigation; Khobar Towers bombing; Greenspan cites investors’ “irrational exuberance” | 13.48% |
| 1997 | Tech “mini-crash” in October & “Pacific Rim crisis”; China takes control of Hong Kong; Iraq disarmament crisis | 15.76% |
| 1998 | Russian ruble crisis; “Asian flu”; Long-term Capital Management debacle; US embassy bombings in Africa | 24.34% |
| 1999 | Y2K paranoia & correction; Clinton impeached; Venezuela’s Hugo Chavez takes power; War in Balkans | 24.93% |
| 2000 | Dot-com bubble begins to burst; Gore v. Bush—contested presidential election; USS Cole bombed | −13.18% |
| 2001 | Recession; September 11 terrorist attacks; IRA bombs BBC; US-Afghan War; Then-contentious Patriot Act becomes law | −16.82% |
| 2002 | Corporate accounting scandals; Sarbanes-Oxley Act passed; Terrorism fears; Tensions with Iraq and “Axis of Evil” | −19.89% |
| 2003 | Mutual fund scandals; Conflict in Iraq; SARS; Space shuttle Columbia explodes; Israeli airstrikes within Syria | 33.11% |
| 2004 | Fears of a weak dollar and US “triple deficits”; Madrid train bombings; Indian Ocean tsunami kills over 100,000 | 14.72% |
| 2005 | Tension with North Korea & Iran over nuclear arms; Hurricane Katrina; Oil price spikes to $70; 7/7 London bombings | 9.49% |
| 2006 | North Korea testing nuclear weapons; Continued war in Iraq & Afghanistan; Mexican Drug War begins | 20.07% |
| 2007 | Financials firms take writedowns; Significant accounting rule change; Israel strikes suspected Syrian nuclear facility; Subprime fears | 9.04% |
| 2008 | Global financial panic; Steepest calendar-year stock market declines since 1930s; Oil exceeds $140; Government bailouts | −40.71% |
| 2009 | Unemployment exceeds 10%; Massive global fiscal and monetary stimulus; US auto bailouts | 29.99% |
| 2010 | PIIGS sovereign debt scares; Double-dip recession fears; “Flash Crash”; US health-care and financial reform laws passed | 11.76% |
| 2011 | Arab spring; Japanese earthquake and tsunami; Continuing PIIGS sovereign debt concerns; Bin Laden killed; US downgraded | −5.54% |
History is never pristine. The world can be a pretty darn scary place—there’s never a dull moment. Yet, through it all, one constant is the resiliency of capital markets. If you’re waiting for things to “calm down” to be invested, you’ll be waiting a long time indeed. And if you didn’t invest during periods of turmoil, you wouldn’t spend much time invested at all—a mistake, since stocks have been up 72% of all years.3
How can stocks rise in the face of all this drama and trauma? Scary things are a constant in the world. Ones that are well known get priced into the market quickly. Their presence is just as often good, not bad, for stocks.
Then, too, remember that in the near term, stocks can wildly wiggle. But over time, their upward sweep represents the potentially infinite upward sweep of profits. As mentioned throughout the book, profit motive is an intensely powerful positive force. It’s at the root of capitalism and the reason free, democratic, capitalistic nations thrive and less-free nations don’t. Profit motive isn’t sapped because humanity faces challenges. In fact, challenges and the need for innovation can be motivating factors for those willing to take risks to chase future profits. Capital markets are resilient because humanity is resilient. Those who’ve bet against that have been proven wrong, time and again.
Notes
1. Eric S. Blake, Christopher W. Landsea and Ethan J. Gibney, “The Deadliest, Costliest and Most Intense United States Tropical Cyclones from 1851 and 2010 (And Other Frequently Requested Hurricane Facts),” NOAA Technical Memorandum NWS NHC-6, August 2011.
2. Ibid.
3. Global Financial Data, Inc., as of 6/27/2012. S&P 500 Total Return Index from 01/31/1926 to 12/31/2011. The S&P 500 Total Return Index is based upon GFD calculations of total returns before 1971. These are estimates by GFD to calculate the values of the S&P Composite before 1971 and are not official values. GFD used data from the Cowles Commission and from S&P itself to calculate total returns for the S&P Composite using the S&P Composite Price Index and dividend yields through 1970, official monthly numbers from 1971 to 1987 and official daily data from 1988 on.