11/2024 - 2000-2024
Full written article below with sources.
Disclaimer: Because of the increased regulation and compliance in the financial industry, I want to start with saying everything in this newsletter is based on my opinion and is not predictive in any way.
Because we are so close to the Presidential Election, I want to start with sharing that the investment strategies we’re utilizing are not dependent on who wins the Oval Office. Because of that, I won’t be commenting on the election.
From the start of 2000 to the end of 2024, we’ll mark a quarter century. Can I get a laugh about the scare of Y2K?
From 2000 to present, the overall market has endured two of the deepest recessions since the Great Depression and two other Recessions.
Most don’t realize that the time frame I’m referencing, 2000-2024 has been the third worst 25 year period of time in the S&P 500 (1929-1954 and 1966-1991 were the first and second worst, respectively). If you’re curious, the time frame evaluated was from 1929-present (source: Yahoo Finance).
Before I get into the data, let me ask you a question… If you invested 100k back in the year 2000, how much would you have on 10/31/2024? Stay with me an I’ll answer that in a few moments.
But first I want to review four different market declines since the turn of the century.
March 24, 2000 to October 4, 2002: S&P 500 dropped 45%, this return was actually pretty good compared to the Nasdaq index which dropped about 75% in value over this same period of time. For those who don’t recall, this was the dot-com recession. Some would call this complete and utter market mania.
October 12, 2007 to March 6, 2009: S&P dropped about 54% and the Nasdaq wasn’t too different. Even though this recession was primarily due to financial and housing price collapse, both indexes were impacted close to the same. I started in the financial industry in 2008. I have vivid memories of the day and actual moment the S&P 500 hit its lowest trading price of 666.79 on March 9, 2009. These scary days still impact my long-term views of the market.
February 19, 2020 to March 23 2020: S&P dropped about 33% with the Nasdaq only doing slightly better. This was the sharpest decline in the history of the S&P 500. During this period, it didn’t seem as though anyone really knew what was happening or going to happen and the entire world seemed to just shut-down.
January 3, 2022 to October 14, 2022: The S&P 500 dropped about 23% with the Nasdaq declining close to 34%. This decline was primary caused by the sudden increase in inflation, which was likely caused by the 40% increase in the money supply (M2) from the Covid pandemic. This rise in inflation was the sharpest increase in 40 years.
If you invested 100k back in the year 2000, how much would you have on 10/31/2024? Would it surprise you that if you invested 100k at the very beginning of 2000 you’d have about 600k today, sourced from Kwanit.com. As you can see from the image, and from what I just unpacked, this is far from a smooth ride.
Now – let me confess to anyone getting this far in my newsletter. Even though I talk about financial markets, risk, history, etc… at nauseum. The three financial events, listed above, that were part of my financial career were just plain scary for me. No one on this earth knows the future.
I’m not free from the concern, worry, and anxiety of the unknowns as the financial markets have gone into a free fall.
I get concerned too.
But here’s where my long-term belief in the capital markets comes from. When we invest, we aren’t just buying the “market” – or buying governments for that matter - no – we’re buying companies. These companies are tasked with innovating products that consumers desire and make a profit from the sale and distribution. And if a company cannot do this successfully over a long enough period, the company ceases to exist. So as long as the earth continues to spin, my belief is that companies will continue their quest to innovate and return profits to the owners of the companies, people like you and me.
So if you’re reading this and you want to participate in the long-term results of the capital markets, you also have to participate in the normal declines in the capital markets.
So when the market appreciates in price, like it has this past year, we planned on that happening (using history as a guide). In the same way, we also planned on the market declining significantly four times in the last 25 years. These ups and down all have to assumed to be able to participate in the long-term market averages.
Or to put another way, as R. Buckminster Fuller famously phrased: “When you pick up one end of the stick, you also pick up the other.”
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.
- Magnificent Seven vs. 2000s Tech Bubble – With all the attention given to these seven companies, I want to share this page from Visual Capitalist. For anyone thinking today’s market mirrors the Tech Bubble, this article paints a very different picture.
- Trillions in Money Markets – At it’s highest level ever reported, there’s now 6.5T in money market funds. In the investing market, this is called “Dry Powder.” These are dollars enjoying higher levels of interest than in years past. But ask yourself, what do you think will happen when/if the Federal reserve starts to cut interest rates and banks start paying less in interest on these accounts? Do you really think people will just continue to hold their funds with less interest, or do you think they’ll look for other alternatives to make money? My guess is assuming interest rates come down, these people will start to move some of these funds back into the broader market. So what do you think would likely happen to market prices if this does occur?
- Breakeven Inflation Rate - 5-Year Breakeven inflation rate is now 2.38%. When you study this chart, you’ll see it goes back to 2004.
- Federal Reserve Balance sheet – The Fed continues to follow through on it’s statement of reducing the balance sheet. We’re now down to $7T dollars in the balance sheet, last time we saw this was September 2020 levels and declining.
- Debt Interest Payments – Most in this country would agree that the Federal Debt is just too high, but did you realize that the interest payments on this debt is now over 1 trillion a year? What should we do about it? My guess is we should balance the government budget…. But no one is asking me.
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
**Case Study Disclosure** The case study presented is purely hypothetical and does not represent actual client results. This study is provided for educational purposes only. Similar, or even positive results, cannot be guaranteed. Each client has their own unique set of circumstances so products and strategies may not by suitable for all people. Please consult with a qualified professional before implementing any strategy discussed herein. No portion of this case study is to be interpreted as a testimonial or endorsement of the firms' investment advisory services.
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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