American humorist Mark Twain once quipped, “I have been through some terrible things in my life, some of which actually happened.” The same can be said of investors. Investors often waste precious time and valuable energy worrying about everything, but how many look back to see if what they were worried about in the past ever occurred?
The reality of many of these terrible things is that A) they were imagined in the first place, or B) they were manageable. The ability of stocks to overcome investors’ concerns has inspired a common phrase: “Climbing a wall of worry.” We’ve seen this in action time and again across the world:
Remember these walls of worry?
- Remember the widespread concern about the Federal Reserve’s monetary policy response to the financial crisis? A decade ago, investors worried that the Fed’s policy, which was designed to combat deep-rooted deflationary impulses, was going to be “massively inflationary,” thereby leading to a spike in US interest rates and depressed equity valuations. But in reality, inflation has remained stubbornly low throughout the cycle,1 US rates have hovered near 2%,2 and US equity indices have been hitting new record highs almost consistently since 2012, with the S&P 500 Index recently closing above 3,000 for the first time ever.3
- Remember the panic over the US Patient Protection and Affordable Care Act of 2010? In particular, investors were concerned that mandating businesses with 50 or more full-time employees to offer health insurance was going to cripple job creation. But as of this June, there were a record 151 million Americans on corporate payrolls,4 and 46.7 million of them work for companies with 49-500 employees.5 That too, is an all-time high. Further, the number of job openings was also near an all-time high as of May, outpacing job hires every month since 2014.6
- Remember when the far-left Syriza party’s victory in the 2015 Greek election was projected to lead to a mass exit from the eurozone? First by Greece, with other peripheral European countries following suit? This was a big story. For a moment, I knew more about Greek politics than I ever imagined. But those fears didn’t come to pass. In early July, the “mainstream,” “business-friendly,” “pro Europe” center-right opposition party New Democracy won the general election. And Greece is now funding its “crushing” debt burden at sub-2.5% interest rates.7
Just this year, we’ve encountered several walls of worry. Six months ago, we worried about Fed tightening, but now the Fed is expected to ease rates. In May, we worried about US tariffs on Mexican goods, then the Trump administration suspended the tariffs. At the beginning of July, we worried about the inverted yield curve, but the spread between the 10-year US Treasury rate and the 1-month US Treasury rate was essentially flat by mid-month.8 I can go on and on, but you get the point.
Tearing down our walls of worry
It’s not our faults. Evolutionary biologists deduce that for most of human history, anxiety and worry were emotions that served humans well — if you see a woolly mammoth, you run. Unfortunately, we are still wired to respond to perceived immediate danger even if our societal goals are much longer term in nature (for example, work hard and get a paycheck in two weeks; save money and retire in 20 years). I believe the problem for investors, given that money has time value, is that the more that we overreact to immediate dangers, then the less likely we are to meet our long-term goals.
So how did I learn to stop worrying and love the market gyrations and the 24-hour news cycle? I haven’t completely. However, I reduce my worry by studying market history (the long-term trends versus the short-term blips) and reminding myself of each of the terrible things (for example, hyperinflation, US jobs recession, eurozone breakup) that never did happen. I document the purpose of my money in a family investment policy statement and articulate in that document that my family is not to break from our well-crafted investment plan based on whims. It’s helpful to reread the statement when volatility arises. I believe other investors may find value in working with their financial advisors to craft policy statements and reminding themselves of their portfolio’s purpose and mission in times of volatility.
1 Source: Bureau of Labor Statistics, June 2019. Inflation represented by the US Consumer Price Index Urban Consumers, which is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
2 Source: Bloomberg, L.P. July 11, 2019
3 Sources: Standard & Poor’s, Bloomberg, L.P., July 2019
4 Source: Bureau of Labor Statistics, June 2019
5 Source: ADP National Employment Report Private Nonfarm Payrolls Medium Firms (50-499), June 2019
6 Source: Bureau of Labor Statistics Job Openings and Labor Turnover Survey, May 2019
7 Source: Bloomberg, L.P. July 11, 2019
8 Source: Bloomberg, L.P. July 11, 2019. The shape of the yield curve, in this instance, is represented by the rate differential between the 10-year US Treasury rate and the 1-month US Treasury rate.
Blog header image: Andy Beales / Unsplash.com
An inverted yield curve is one in which shorter-term bonds have a higher yield than longer-term bonds of the same credit quality. In a normal yield curve, longer-term bonds have a higher yield. The difference between these two values is referred to as a spread.
The opinions referenced above are those of Brian Levitt as of July 22, 2019. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.