Keeping Your Head During Market Chaos

You may have heard the famous line: “If you can keep your head when all about you are losing theirs…” from Rudyard Kipling’s poem “IF”. According to the Poetry Foundation, the poem “emphasizes the importance of maintaining composure and integrity in the face of adversity and chaos. It encourages readers to trust themselves, be patient, and remain true to their values, even when others may doubt or criticize them.” It is probably safe to say there is plenty of “adversity and chaos” around the world today. While history doesn’t repeat, and it is important to note the context, it often rhymes. History can provide some guidance in times like these.

 

 

World War I began in November of 1914, but the US didn’t enter the war until 1917. Germany’s unrestricted submarine warfare had resulted in the sinking of some ships that had American citizens on them, but it was the intercepted Zimmerman Telegram—a secret communication from the German Foreign Minister to Mexico proposing a military alliance—that finally swayed the American public to enter the war in April 1917.

 

 

Let’s assume that you were an investor in July of 1914, deeply concerned about global instability, and sold your stock investments when the S&P Composite total return index was at 2,145. By the end of the war in 1918, the index had declined to 1,827, so your hunch proved clairvoyant. Saving 15% is something, but considering the gravity of the event, it was hardly the catastrophic collapse one might have expected. Now let’s look at an even greater test—World War II.

 

 

The Treaty of Versailles in 1919 left the German economy in shambles, never giving it a chance to recover from the war. This economic disaster opened the door for Hitler who came to power in 1933. So, you, being the astute investor you are, sold everything in January of 1933 when the market stood at 4,645. Hopefully, you reinvested after World War I when the index was at 1,827—you may notice that the market had increased by 154% in about 15 years.

 

 

If you are a student of history at all you know that the 1930s were dark times in Europe and despite Churchill’s constant warnings against Hitler, few listened. By the time the US entered the war following the bombing of Pearl Harbor in December of 1941, the S&P Composite had risen to 7,595—up over 60% from 1933, all during a very unfavorable political environment. By January 1945, the market had climbed to 12,210. You were much better off remaining invested throughout the entire period leading up to and including WWII. So here are a few observations.

 

 

It is easy to look back and say, “that was obvious,” the US economy was booming for the war effort. However, at the time it was not obvious that we would even win, especially at the beginning of the war. There were no major battle victories until Midway, and the war created massive economic disruptions. Consumers were very restricted as to what they could buy, and this went on for several years. But of course, we know now that it was obvious, and it would all work out. They didn’t.

 

 

The great thing about our country is that it has checks and balances. There is the President, there is Congress, there is the Supreme Court, and then there are the markets. People tend to forget that everyone wants to buy stuff, go on vacation, own a home, and have the option to retire. If investors suspect their lifestyle is in jeopardy, things change fast. If the political system fails to change, the markets will force a change. If the stock market thinks there is a real problem, it will decline by a lot very quickly. As unpredictable as our president is, it doesn’t appear he wants to be responsible for an economic collapse. The economy seems to be his identity.

 

 

This is probably a great time to heed Kipling’s advice and keep your head. It may be difficult for a period, but it is very hard to imagine the next four years being worse than 1933. Remember, there is never a memo sent out telling you when to get back in. The great news is that corporate America adapts and moves on. If you doubt that, read Warren Buffett’s current letter to shareholders—he still seems optimistic about America, and I am pretty sure he didn’t vote for Trump.

Observations On the Market No. 404