40 Years ago this week, Newsweek had one of its most infamous headlines: “The Death of Equities: How inflation is destroying the stock market”. This was the cover headline August 13, 1979.
The financial media and media in general are always trying to project fear into investors and this particular headline was the most troubling. It accomplished the task as numerous investors forswore ever investing in the stock market ever again.
So how have the last 40 years gone for the stock market?
Well equities also known as stocks certainly didn’t die. As stocks in the United States and around the world continue to flourish. The world does not end. The S&P 500 index – which accounts for the largest U.S. based companies – closed on August 13, 1979 at 107. In the middle of August 2019 that same index is approximately 2,900.
These companies in the S&P 500 index paid their owners approximately $6 in dividends in 1979. This year, the estimate is for the current S&P 500 companies to pay dividends of approximately $56 on an annual basis – up 9 times. This while inflation is up barely 3.5 times during this time period.
As we have often written, investing in the ownership of companies (stocks) has allowed investors to not only keep pace with inflation, but to grow considerably more than the rate of inflation. This allows investors to maintain purchasing power through time and especially in retirement.
You can look at other stock market indices covering other parts of the world and see similar results.
What has driven these incredible returns time for stocks?
The U.S. GDP in 1979 was well below $7 trillion and today is running approximately $19 trillion, while the real GDP per capita went from $31,000 to $57,500. Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced in a specific time period, often annually. Real GDP per capita is a measurement of the total economic output of a country divided by the number of people and adjusted for inflation. So regardless of what you hear else where, the U.S. has more people producing more goods and services. This growing and improving economy results in more profits for these companies and thus their shares become more valuable through time.
If you look at three data points over the last 30 years (since 1989), you get to capture why the stock market is able to derive these returns and allow investors the opportunity to maintain purchasing power.
The consumer price index which captures the inflation rate is up 2 times since 1989. Meanwhile, the S&P 500 index is up 8 times during this time while the S&P 500 cash dividend is up 5 times.
Nothing about the current economy and the incredible advances in artificial intelligence, medical research, and the incredible global growth of the middle class leads one to believe that this continuing growth of the global economy will be slow in the future. But the goal of financial journalism is not to focus on these big picture items. Their focus will always run to the negative which is more attractive to humans.
This negative approach has a consequence as seen by the money flows as investors move money into bond funds at every slight decrease in the stock market. This occurred at the end of 2018 with the bear market as well as in June 2019 when the stock market declined 7%.
According to Bernstein research in June 2019, their regular survey of 179 global money managers allocations showed that equities percentages were at their lowest levels in history, while the month over month jump into cash and cash equivalents was the largest since the panic month of August 2011.
Investors need to continue to approach investing with long-term goals in mind while understanding and expecting temporary stock market declines. This approach will allow you to capture the long-term returns of the global stock markets that will be necessary to maintain your lifestyle throughout you and your family’s lives.
Regardless of the headlines, this time is not different. It just looks different.
Hope you have a great week!
If you know of anyone that you think would appreciate this email, please don’t hesitate to forward it on.