Some things are being sold during this holiday season in the market.
Never ignore Okam’s razor as an explanation for events you find confusing. Born in 1285, says William of Oakham Non-plurality is placed without the needWhich translates “Plural positions should not be held without necessity“Or to make it more accessible:” Among competing theories, the simpler explanation should be preferred.
This should be borne in mind when you read many competitive explanations for why the market is selling this year. The complex combination of inflation, war, rising Fed funds rates, depletion of cheap capital, liquidity crunch, impending recession and political instability is suggested with my favorite commentator. “All of this is the fault of passive indexing“
Perhaps we can channel William of Ockham’s approach to find comfort in a simple explanation: Money back.
Consider some details about returns: In the long run, the equity market produces an average return of 8-9%. Over the past decade, we’ve enjoyed returns above 14% per year (18.9% we go back to 2009 lows); During that decade, the last two years have seen an increase of 20% and 28%.
What is happening in 2022? Perhaps this is nothing more complicated than the average return. If you prefer to adapt to a new rate system or to increase the cost of capital in the future, of course, descriptive explanations work for you no matter what. Just know that any of these stories can easily be told any year in the previous decade.
From 2012 to 2021, the S&P 500 returns annually
Note that these nominal price gains of 234.2% or 14.3% per annum do not include dividends and are not inflation-adjusted. If you’re a fan of history, consider the bull market that existed before:
1982-2000 S&P 500 returns annually
The same story with this nominal price gain of 1100% or 14.8% per annum (no dividends, no inflation-adjustment). It was a hell in 18 years with almost half the profit in the last 4 years. Another secular bull market to consider is the post-war era, from 1946 to 1966.
1946-1966, S&P 500 returns annually
The 455% profit generated a more modest annual return of 11.3%.
Maybe this time is different and history is just scattered, not repetitive. The world is complex, and we should avoid over-simplification that should not be over-simplified.
That said, there are three things that stand out to me from this chart:
1) The rapid rate of return over the last decade and especially the last two years probably means a return (vs. historical average).
2) The long-term secular bull market could last 15 to 20 years (I’ve been dating it since March 2013).
3) Must be in this market for another 5-7 years (assuming random events don’t make it random)
This is how I have been looking at this market for some time. It is one part market history, one part secular theory and two parts intentional thinking.
But it’s an honest approach, and better than most of the irrational descriptive mistakes you’ve seen and heard over the last few months. . .
The end of secular bulls? Not so fast (April 3, 2020)
Redefining the Bull and Bear Market (August 14, 2017)
Bull Market Period (January 15, 2013)
Looking Too Long (November 6, 2003)
Bull and bear market