The Best of Times?

We spend a fair amount of time reading in order to stay informed. From newspapers, financial magazines, blogs, books, etc. we try to constantly learn and challenge our thinking. From time to time when I read something that really stands out, I’ll save a copy for future reference. A few days ago I was looking through my file of saved articles and I came across a Wall Street Journal article from 2008. The article, “Stop Worrying, and Learn to Love the Bear,” was written by Jason Zweig on July 12, 2008. As I re-read the article, I was struck by the juxtaposition of the situation today compared to when the article was written. 

As you probably remember, in the summer of 2008, the stock market had already begun its descent into what would later be known as the Great Financial Crisis, and although the Dow Jones Industrial Average had already declined 20%, the real fun had yet to begin. In two months the venerable investment bank Lehman Brothers would fail, global financial panic would ensue, and the S&P 500 would decline by 46% until bottoming in March 2009. In the article, Zweig pointed out that although stocks were technically in a bear market, (as the Dow had declined by 20% from its previous high) they had really been in a bear market since 2000. From early 2000 to that point in July 2008, the S&P 500 had produced an annual rate of return of only 0.63%. At that point in time, investors who had been counting on the market producing its long-term historical rate of 10% had been sorely disappointed. However, in the eight years from July 2008 to July 2016, the S&P 500 returned over 9% per year. If you calculate the return from the market’s bottom in March 2009 until mid-December 2016, the annual return jumps to about 19%. Investors in 2008 looking back the previous eight years had endured very poor returns and things were about to get much worse. Yet, investors looking back eight years from today have enjoyed strong returns as the market has closed at numerous all-time highs this year.

After dwelling on the poor market returns since 2000, Zweig, in his 2008 article, posed the following question and his response: “Could things possibly get worse? I don’t know, but I am an optimist – so I certainly hope things get worse. Nothing else should satisfy an intelligent investor.” Zweig went on to explain himself: “If you are still in your saving and investing years, a bear market is a gift from the financial gods – and the longer it lasts, the better off you will be. Instead of running from the bear, you should embrace him.”

Zweig’s perspective on this issue is the reason I saved the article. The idea that he was hoping the market would continue to decline (he got his wish by the way) is probably the complete opposite of how most people feel because it goes against our most basic emotions. We don’t like to see our investment accounts decline. Yet, I think he has the proper mindset for a long-term investor. For people who are saving for a retirement many years into the future and are regularly adding to their investments, a bear market really would be, as he describes, a gift from the financial gods as stock could be purchased for bargain prices. Yet most people view it as the exact opposite.

Sitting here today in late December 2016, we’ve enjoyed strong market returns since the financial crisis and investor sentiment seems generally positive. For the markets, is it the best of times? Maybe we should pose the opposite of the question asked by Zweig: could things possibly get better? I don’t know what 2017 holds for the stock market but I’m pretty sure I wouldn’t consider this the best of times. That title has to belong in March of 2009, which was the lowest point for the S&P 500 in the past 20 years.