11/2023 - Profit Motives
Full written article below.
Since 2009, the overall Market has been anything than normal, or has it?
From March of 2009 (end of Financial Recession), to February 2020 (before Covid-19 Recession), the S&P 500 returned a touch over 17% annually. This wonderful 17% annualized return was anything but smooth (see last month’s newsletter for more detail). Then the market cratered about 30% in about 30 days.
Then from the bottom of the Covid-19 recession (3/20/2020) to December 31, 2021, the S&P 500 rocketed up at a 49% annualized rate.
Then from December 31, 2021 to October 31, 2023, the market is down an annualized 5.43%. We are close to two years since a new market high.
But what about investment returns from March 2009 to October 31 2023? Take a wild guess, what do you think the annualized return has been, would it surprise you to see the annualized return close to 14.5%? Let me put this another way, if you put 100k into the market back in 2009, you’d now have close to 500k (assuming dividends reinvested). My argument is that this return has only been possible by businesses with a profit motive.
Since 2009, I would assume that all of us want this 14+% return, but to obtain this return, you have to be fully invested in the broader market.
So let me define the “broader market” – this does NOT mean a blind allocation to just some indexes, this DOES mean working towards buying some of the greatest companies in the world that have a profit motive.
Let me be clear, we are currently facing a slew of current and potential economic headwinds, I’ll list just a few here.
- Ukraine War – can we just call this what it is, basically a proxy war between Russia and the West
- Israel and Hamas War – who knows how long this will go, and don’t forget Iran is getting closer to nuclear weapons capabilities.
- Federal Debt – increasing at an alarming rate, especially in a period of low unemployment and strong business activity, more data here.
- “Mother of all Fiscal Cliffs” – In 2025, America will be facing the “Mother of all Fiscal Cliffs” with about 5 Trillion in debt scheduled to hit, the TCJA set to expire, along other challenges. National Review
- Federal Reserve – The market continues to react forcefully to the actions of the Federal Reserve
- Education Impact – Covid shutdown procedures are having lasting negative impacts on the education system and testing outcomes, Edweek.com.
- Entitlement Spending – Namely Medicare and Social Security are on their way to insolvency.
- Mortgage Rates – With interest rates being high, the “Affordability Index” for a home continues to drop, source.
- Political Environment – When you think our political landscape can’t get any more partisan, it seems we keep walking further down this path.
Based on some of these aforementioned items, I might be scaring some of my readers into building bunkers, buying guns, and holding gold coins.
Yes, we do face a myriad of financial challenges, and yes “today’s” challenges are different in description than the challenges we’ve faced in the past. But every time a catastrophist has called for the world to end, it just hasn’t occurred. The world hasn’t ended, and the Global Economy has continued to advance.
No, I’m not blindly signing Kumbaya, but I am absolutely saying the Global Economy has faced numerous challenges over the past several thousand years and the Global Economy has continued to march forward. The world just continues to spin and some of the arguably greatest companies in the world keep figuring out how to make money and return value to their shareholders, like you and me.
The economy can never be forecasted or timed or known.
Because of this when I talk about investing, the central idea is that we work towards putting capital/investment dollars, with some of the best managers in the world. The job of these managers is to try and protect that capital and make money with that capital, they have a profit motive.
No country or power on earth can force a company to lose money, unless of course they are committing a crime, but I’ll assume not in this exercise. Let me highlight just two examples to make my point.
Retailers in San Francisco – Because of the policies enacted by the local government in San Francisco, which are causing high amounts of shoplifting, crime, and lack of employee safety, numerous retailers are leaving the city simply because they aren’t able to make a profit. Some of the current businesses are Whole Foods, Nordstrom, Amazon Go, and more. These businesses are all profit seeking, and San Francisco local government cannot force these profit seeking business to stay open in this city. Because these are rational businesses, they are simply closing shop and moving to areas where they can be profitable. No local government can force these businesses to lose money and Global Economy continues to march forward.
Marriott – A prime business to be absolutely destroyed during the Covid-19 pandemic. But did Marriott simply close their doors and cease to exist? No. They closed their doors when they had to and furloughed their staff when they had to in order to preserve their cash on hand, so they could open their doors when they could. The result? Marriott was trading at close to $143/share before the Covid-19 Recession, then down to $59/share at the bottom of the Covid-19 Recession, and are now trading near $185/share. Like I just stated, no country or power on earth can force a company to lose money and the Global Economy continues to march forward.
Even the best managers in the world will lose money from time to time and even the best run business fall victim to bureaucracy that gets in the way of profits and too many layers of management which create waste. Just think of prior business giants like GE and Bear Stearns. Current market downturns shouldn’t be unexpected, in fact, according to Capital Group, a 5% decline in the stock market typically happens three times a year and a 10% decline happens about once a year. So yes, we should actually expect the market to decline in value, which is just “normal.”
At this point, I realize I’m getting long in the tooth with this newsletter, so let me wrap it up. The market continues to go in two directions, up and down, the Global Economy continues to advance in the face of countless uncertainties. And unless you believe the world is going to end because of these uncertainties, my full encouragement is to develop a long-term financial plan, which my clients have already done, then have your investments be diversified in rational, profit-seeking companies, the broader economy cannot be forecast, then stick with your plan.
In volatile market times, like now, the aforementioned statement is easy say, but is hard to act out. If you’re a client I work with or not and are questioning your current plan don’t let these questions fester. Just reach out and let’s talk things through.
Additional Data: Each month I get asked by clients what additional resources I’m looking at. Please hear me in stating I’m not trying to predict anything whatsoever, just some of the interesting data I’m watching.
- Did We Just Hit Bottom? – Was my blog post from Nov 2022, where I make the argument that we may have hit bottom, we still need another year or so to know if I was right or wrong. Regardless, since the date cited, the markets are up close to 21% (dates from 10/13/22 to 09/06/23 source: Yahoo Finance)
- BLS.gov - continued PPI reduction, peak was in March 2022.
- Breakeven Inflation Rate - Federal Reserve – 5-Year Breakeven inflation rate is now 2.32%. When you study this chart, you’ll see it goes back to 2004.
- Federal Reserve Balance sheet – For months the Fed was following through on it’s statement made in May 2022 of reducing the balance sheet by 47.5 billion per month in months June-Aug 2022, then reducing the balance sheet by 95 billion per month. But, just recently, you’ll see the balance sheet spike up by 300 billion with the new bank lending program but then a quick reversal. The Fed has shed about 1 trillion in the last 18 months, the progress is slow, but headed the right direction.
Market Truths
1. The Stock Market cannot be consistently known or timed
2. The Economy (as you define it) cannot be consistently known or timed
3. Over the past 100 years, the market has returned 10.45% (with dividends reinvested). It’d be difficult for someone to achieve this return if they did not simply stay invested. Data Source
4. The average intra-year market decline is about 14% and the market drops 15% or more every 3 years. J.P. Morgan | American Funds
5. Investing in equities has historically been volatile, my guess is it always will be, however when you consider equities (using the S&P 500 as a proxy), Real Estate, short-term bonds and corporate bonds, over the long-term, equities continue to be the historical winner. To crystallize this point, just look for yourself NYU.edu.
Market Beliefs
1. Because the future cannot be known, we must embrace the belief that the world isn’t going to end during our lifetimes, and if it does, our money doesn’t matter
2. The world has continued to advance, since well before Jesus walked the earth, so assuming the world doesn’t end, it’s rational to believe the world will continue to advance
In closing: We of course cannot control what the market does from here and we cannot predict when the next market downturn will occur. But we can control our behavior to these outside events and continue to stick with our long-term investment strategy.
As always, if you have any questions/concerns please contact me.
David Hobbs, CFP®
Wealth Advisor | Owner
Hobbs Wealth Management
Standard & Poor’s 500 (S&P 500) - a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy.
Russell 2000 – The index measures the performance of the small-cap segment of the US equity universe. It is a subset of the Russell 3000 and includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.
MSCI ACWI ex USA – The index measures the performance of the large and mid-cap segments of the particular regions, excluding USA equity securities, including developed and emerging market. It is free float-adjusted market-capitalization weighted.
Federal Funds Rate - refers to the target interest rate set by the Federal Open Market Committee (FOMC). This target is the rate at which commercial banks borrow and lend their excess reserves to each other overnight.
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