The year 2020 has presented a number of challenges to investors. A global pandemic, social unrest, bitter political fights, and a looming presidential election have led to increased uncertainty. How should investors adjust their long-term strategy in light of these near-term challenges?
At Leelyn Smith, we seek to build an investment strategy that helps our clients pursue their goals across all market cycles. This approach is built on seven investment pillars that we have developed, refined, and affirmed over our careers as investors.
One of our core investment beliefs is that economic progress is the engine that builds long-term wealth. At our core, we are optimists who believe that wealth is a positive-sum game. Innovations in technology, healthcare, and manufacturing fuel economic growth that, over the long term, improves quality of life for all people.
Although there are periodic disruptions, history has shown that the U.S. stock market reflects this economic progress and generally goes up over time, despite periods of decline and occasional crashes. As a result, we believe that staying invested and not trying to “time the market” is the best way to build wealth.
Here, we provide more detail on why we at Leelyn Smith categorize ourselves as “long-term bulls.”
You’ve got a friend in economic progress (and the Fed).
We live in a free-market society that is intended to promote economic advancement and growth. Here is a simplified way to think about the chain of events that drives our economy forward: Businesses prosper (and those that don’t shutter); they hire more people, demand more inputs from suppliers, and deliver goods and services for a greater number of people; the company’s employees and contractors put more money into the system; more businesses and individuals are affected; and the cycle of economic progress continues. This scenario is the basic backbone of our economy: Consumer spending generally accounts for about 70 percent of all economic growth.
Of course, there is also a flip side to this model: When businesses struggle, they hire fewer workers or lay off some of their current employees; this leads to less cumulative spending power, resulting in slower economic growth, and even reces- sions. But these downturns tend to be much shorter in duration relative to the longer-term forward progress made during periods of expansion.
On average, America’s post-war recessions have lasted only 11 months, while periods of expansion have lasted 65 months1. While external events – such as COVID-19 – can lead to temporary downturns, the overall, long-term movement of the economy has been onward and upward.
And a similar pattern can be seen in financial markets. They go through short-term volatility quite often, but for nearly a century, the long-term trend has been one of ascent. According to First Trust Advisors, since 1926, the average bull market has lasted 6.6 years, with an average cumulative total return of 339%, while the average bear market has lasted just 1.3 years, with an average cumulative loss of -36%.
Bull and Bear Markets from 1926 to 2019.2
|Average Length (Years)||Average Total Return|
|Bull Market||6.6 years||339%|
|Bear Market||1.3 years||-36%|
Even within a shorter time frame, markets often bounce back relatively quickly from major downturns. A year after it had reached its low point during the financial crisis of 2008–09, the market was up by over 60 percent from its March 2009 low. The COVID-19 pandemic provides an even more recent example: When the true nature of the pandemic became apparent in early 2020, the Dow Jones Industrial Average fell more than 35 percent from its recent highs – but six months later, it had gained about 44 percent from its March 2020 low.
These numbers indicate that our economic system tends to work in creating wealth over time – for employees, consumers, and investors. Are there disruptions? Absolutely. Does everybody benefit all the time? Unfortunately, no. The system is not perfect. But over the long term, our economy and the stock market tend to advance.
We even have an official “endorsement” of this economic growth philosophy, in the form of the objectives of the U.S. Federal Reserve. The Fed sets goals for both inflation (about 2 percent a year) and full employment (an “ideal” unemployment rate of slightly over 4 percent). And with its powerful tools, such as the ability to control interest rates and the capacity to buy billions of dollars of bonds, the Fed’s actions seek to support a continued push toward growth over the long term.
The United States’ economic structure, the financial markets’ historical scorecard, and the mission of the Fed all contribute to our being long-term bulls. But it takes more than optimism to be good stewards of other people’s money.
As always, if you have any questions about the beliefs the underpin our investment approach or your financial situation, please contact us.
- National Bureau of Economic Research (www.nber.org/cycles.html). Data does not include the impacts of COVID-19.
- First Trust Advisors L.P., Bloomberg. Past performance is no guarantee of future results. These results are based on monthly returns—returns using different periods would produce different results. The S&P 500 Index is an unmanaged index of 500 stocks used to measure large-cap U.S. stock market performance. Investors cannot invest directly in an index. Index returns do not reflect any fees, expenses, or sales charges. This data is for illustrative purposes only and not indicative of any actual investment. These returns were the result of certain market factors and events which may not be repeated in the future.