Paul Winkler: Welcome to the “Investor Coaching Show.” I am Paul Winkler talking about the topic of money. I’m going to talk about some data, because we’ve all been hearing talk about market volatility.
As I always say, nobody worries about upside volatility. It’s always downside volatility that eats people’s lunch. Upside volatility is no problem at all, but downside volatility comes with the territory.
I like what Michael DelGiorno always says, “Don’t let a temporary period of difficulty screw up your long-term plans, because good times are coming,” and they always are as we go through these cycles, but it’s hard to see them when you’re going through it.
The Market and Asset Classes
So I want to talk a little bit about periods in time, because the recent headlines on inflation show inflation getting higher.
We’re hearing over and over a drum beat of how this is the worst inflation in 40 years.
That’s what people keep talking about—the worst inflation numbers, difficulties, and challenges ever. Yet, go back 40 years, back to the early 1980s, where were we then?
What I thought I would talk about is what was going on at that point in time, and then share a little bit of data from that point in time. So I pulled up quarterly data of various areas of the market, or various asset classes as we call them.
When we talk about the market on this show, it’s a lot more broad than when you hear it talked about elsewhere in the media. Typically, the media, even in the financial community, considers the market to be mainly large U.S. stocks.
If you look at the total market indexes versus the S&P 500, you don’t see much difference, or the DOW or the NASDAQ. All you ever hear talked about are those things.
I like to talk about market segments, like large U.S. stocks, and sometimes you hear about value.
The value that is talked about is very different from what I mean when I’m talking about value.
A lot of times when you hear Wall Street talk about value, they’re looking at companies that they consider to be “undervalued,” or they’re looking at price to earnings ratios only.
Price to book is really what I like to look at. That’s what Fama, the Nobel Prize-winning economist that coined the term “value” actually looked at—so that’s what I’m going to look at as well.
Small U.S. stocks would be the 20% smallest companies on the New York Stock Exchange and all like-sized companies on other exchanges. They both have indexes together, small research indexes, small value and large value research indexes.
And then you’ve got international large companies, international small companies, and those are the six basic categories that I’ll talk about. But if you look back at the last time we had inflation numbers akin to what we’re seeing right now, there was a lot of talk, a lot of media coverage on inflation toward the end of the year.
Market Downturns Aren’t Unusual
So that’s why I’m choosing that particular period of time. If you look at large U.S. stocks in that one quarter, large U.S. stocks dropped a little bit over 10%.
Now, there were several other periods of time before that which didn’t have a great return as well. They had negative returns, but I want to focus on that one, because that was the worst quarter, which is where they were talking about inflation the most at that point in time.
So you see that market downturns aren’t that unusual. So you had some dissimilar price movement where things moved in different ways and didn’t move down at the same degree is really what I’m talking about.
Now, if we walk through the decade of the eighties, we’re looking at a period of time at the very, very beginning of the 1980s when there was a lot of stuff going on in regards to inflation, and economic problems. Inflation was called “stagflation” back then because of the stagnant economy going along with inflation, which wasn’t supposed to be able to happen.
Typically, inflation is where prices go up, and typically prices going up happens when there’s excess demand. And therefore what happens is you don’t have the ability to produce, you don’t have the numbers of people to produce, so the wages go up and prices go up.
Typically inflation happens when demand occurs in excess and the ability to produce decreases.
Then you have oil price problems and you have fuel issues and those types of things. There were a lot of things that caused inflation to go up, but the economy wasn’t necessarily that great, so they say.
So that’s what was talked about at that point in time. That was the narrative.
Inflation Fear and Response
Now, if we look at the decade of the eighties as a whole from January of 1980 through December of 1989, that whole period of time, rather than give you rates of return, because sometimes it doesn’t compute with people, we will look at the growth of a dollar.
There was about a fivefold growth in the S&P 500 during that period of time, just a little bit over fivefold. If you look at large value stocks, it’s a little bit over sixfold, the dollar grew to $6.41.
If you look at the growth of small companies, it tripled. If you look at small U.S. value stocks, there was a sevenfold increase.
Try to wrap your brain around a sevenfold increase in value. I’ve often talked about how stocks protect against inflation.
You will hear people say, “I’m going to get out of stocks because of inflation.” When I hear that I wonder what else they’re going to get into … CDs?
Well, what’s the one thing that can’t ever protect you against inflation? Annuities. It’s illogical to turn to the thing that can’t protect you against inflation.
It’s funny because I hear my words parroted back to me by people. I hear, “I know that in the short run stocks go down with inflation, but the long run is the biggest protector against inflation because inflation price is going up and companies are raising prices and you own companies when you own stocks.”
To which I say, “Good, you’re hearing the message.”
The more I can educate, the more I can get you to understand how this stuff works and keep you from expecting things to be rosy all the time.
Now, international large stocks over that same decade had about an eightfold increase. And if you look at small international stocks, almost a thirteenfold increase.
Now, just wrap your brain around that for a second and ask what was being said during that period in time? What was being said in the media?
I looked back at the headlines back at that point in time very early … I just put inflation in the search bar, and one of the first articles to pop up was this, “Reaganomics: Why Isn’t Wall Street Convinced?”
Media and Statistics from the 1980s
The article said, “Well, there are four things going on here. First, the economy is incorrectly perceived as brittle when actually it has good momentum.”
So you look at that and see that as the narrative. The economy, remember, was perceived as really bad.
But in the media, they said it wasn’t necessarily that bad.
It may have been incorrectly perceived. And it’s funny because things are relative, aren’t they?
On one side we hear from one political party that the economy’s great. Then from the other side, we hear that the economy’s terrible.
And of course, you’re going to have the one that wants to get reelected say the economy’s great. And the one that doesn’t want the re-election to occur in the other party’s favor say it’s terrible, but things are relative.
And it’s interesting because I went and pulled some data from The Economist, and lo and behold, this is interesting. If you look at the last year, according to the most recent issue of The Economist, there was growth.
They looked at gross domestic product gains over the last calendar year. The United States had 3.5% economic growth. Well, you look at that and you go, “Hey, you could make a case that’s pretty decent.” But like I said, everything’s relative.
Now I don’t get into politics here, but I’m almost going to have to get kind of almost political, but not really in this because I just want you to hear the relative numbers for all of this.
Remember the U.S. had 3.5% economic growth.
- China, 4.8%
- Great Britain, 8.7%
- Austria, 5.5%
- Belgium, 4.9%
- France, 4.5%
- Germany, 3.8%
- Greece, 7.4%
- Italy, 6.2%
- Netherlands, 7.0%
- Spain, 5.5%
- Czech Republic, 5.1%
- Denmark, 6.6%
- Norway, 4.8%
- Poland, 9.4%
- Switzerland, 4.4%
- Turkey, 7.3%
- India, 4.1%
- Malaysia, 5.0%
- Pakistan, 6.2%
- Philippines, 8.3%
- Argentina, 8.6%
- Colombia 8.2%
- Egypt, 8.3%
- Israel, 9.6%
So you look at that and go, “Whoa, wait a minute. That’s interesting.”
But back then, it was maybe the same thing going on because if you look at international stocks over the ensuing decade, international stocks did better as I read those numbers off.
So it may be that just relatively we weren’t doing as well back then. But remember, this was when Reagan was early on in his presidency and they said that number one, the economy’s incorrectly perceived as brittle.
It was going up. In essence it had good momentum.
The article said that second, inflation is not going to be solved soon.
This is interesting. This was 1981. This is when all of this information about inflation rates came up.
What are they saying about inflation right now? We’re not going to solve this anytime soon. It’s going to be a long time.
And I just kind of put my hands in the air. I don’t know. I don’t predict the future.
I’ve never found predicting the future to be a helpful exercise as an investor because it doesn’t work. You can’t do it.
You’ve got to be able to predict not only what’s going on in the economy, but what companies are going to do, how are they going to respond, how governments are going to respond, how people are going to respond.
Are they going to spend? Are they not going to spend?
Are they going to hide? Are they not going to hide?
Is China going to open back up? Is something going to be resolved in Russia?
But 40 years ago—this is why Wall Street wasn’t convinced about Reaganomics—they said, second, inflation is not about to be resolved. They were just basically saying some of the things that he was doing, and they had really rational reasons why it wasn’t going to be resolved in this article.
I won’t get into them, but they had some pretty rational reasons that made sense from a logical standpoint. Third, fiscal policy will continue to be expansionary, and fourth, a great burden will be placed on monetary policy.
Walk Through Economical History
We are all talking about housing prices a lot right now. We want an inside look at why housing prices are so high.
Isn’t it interesting that in the first part of the 1980s when inflation rates were really high, mortgage rates were really, really high.
Interest rates were just jumping up, and you had to go and get typically an adjustable rate mortgage to be able to afford a place.
Back then, housing prices were so high as well. And then the one I’ll leave you with, the last headline, “America in Ruins.”
It was over in 1981. We just didn’t know it.
We didn’t know it before you had a fivefold increase in the S&P 500, an eightfold increase in international stocks, elevenfold increase in international small stocks.
We just didn’t realize it was over. We needed these publications to tell us that everything was over, but all is different now. It’s always something different.
Walk through history and be reminded about how bad things have been in the past and that there has always been something to be absolutely petrified about.
There’s another article in The Economist about the new nuclear era, and it’s all about how all this proliferation reflects a weakening of the moral revulsion that restrains the use of nuclear weapons.
This is a direct quote from the article:
“As memories of Hiroshima and Nagasaki fade, people fail to grasp how the detonation of a small battlefield weapon of the sort Mr. Putin might lob could escalate in a tit for tat annihilation of entire cities.”
It’s the stuff that I heard in the 1970s and the stuff heard in the 1960s. If you don’t remember that, go back and look at the headlines.
It was absolute fear and people were petrified, and I’m not saying nothing bad will ever happen. There will always be bad stuff.
It Helps to Understand
I really can’t say anything that will fix it all, but I think it helps to understand that we have been through very, very similar types of things. They always say that history doesn’t repeat itself, but it rhymes.
History may not repeat itself, but it does rhyme.
If you look at markets around the world right now and the pricing of stocks, there are areas of the market down 15% and 20%, but international value stocks are down 3%. And in value stocks, U.S. small value stocks are down 5%.
So that is noise, as we call it in the investing world. A 5% move is noise.
You can have 15% moves in one day. And these areas of the market, like international value, are still only selling for 94 cents on every dollar.
They’re selling for less than the assets of the company. Small values are $1.09, that’s it.
And of course, because you’ve had some recent volatility, it would be even lower than that right now. So in essence, it’s even lower than what I’m talking about.
The markets are displaying the thought process that things are a little bit challenging right now. So they’re not sitting at lofty prices as if everybody’s oblivious to the things that people are fearful of.
And the reality is that so many of the headlines I bring out here on the show from time to time, are essentially the same exact headline as one from 40 years ago. We had the same prognostications 40 years ago.
Now I’m not saying it’s exactly the same, it never is. But the reality of it is that these things happen over and over again.
And what we do as investors, we forget.
If we, as investors, forget how we come out of these things and then go and make a mistake that’s a permanent mistake based on temporary conditions, we’ll certainly regret it.
If all this stuff is true, if we look at it and think maybe our growth rate isn’t as good as other areas around the world, that’s when change occurs in Washington, either by a current party changing.
And I don’t know if that I see that, but more likely an election because as a matter of fact, The Economist, they were actually talking about how it’s looking pretty likely that there’ll be a seat change in the fall.
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