"Monday, Monday, can't trust that day
Monday, Monday, sometimes it just turns out that way
Oh Monday mornin' you gave me no warnin' of what was to be""Monday, Monday," Written by John Phillips, sung by The Mamas and the Papas, 1966
I don't trust the stock market.
I hope Democrats don't use it as evidence that Biden is doing a good job.
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| CNBC Headline for this photo: "BIDEN FLAUNTS STOCK MARKET RECORD HIGHS" |
The U.S. stock market is connected to the economy, but only loosely. If the stock market "made sense," based on earnings or the general business climate, then it would be predictable. In that case, investors would not collect a risk premium for investing in stocks. The market's wild unpredictability is a feature, not a bug.
The U.S. stock market has averaged growth of just under 10% a year for the past century, but there are three giant caveats.
1. That is the past. The future might be far different.
2. The stock market can disappoint at the most inconvenient times.
3. You don't get average.
Thirty years as an investment advisor taught me that it is dangerous for clients to read financial plans that predict compounded future returns. Those smooth lines of compounded average values presented in financial planning tools are hopes, not plans. The Boomer experience is unlikely to be repeated. The investment experience of people age 60 to 80 benefited from the industrial plant of the U.S. being left intact while those of other industrial powers -- Germany, Japan, U.K., France, and the Soviet Union -- were damaged or obliterated. That shaped the past, but is unlikely to shape the future.
You don't get "about average" returns. You get what you get. Even a good outcome over a four-or eight-year presidential administration, one, in fact, averaging 10% a year, is not a succession of returns of 8%, 12%, 9%, and then 11% -- returns that cluster around the average. Returns ping-pong up and down and are rarely very close to the 10% average. Average comes from a mix of happy surprises and great disappointments.
Here is a chart of actual returns:
There is a slight cluster around 10% but most yearly returns are well above or below that midpoint. Psychologically and politically, there is a lot of difference between zero and plus-20%. Year-to-year returns don't necessarily revert to the mean. Notice the years 2000, 2001, and 2003, when there were three negative years in a row. Lower prices compounded lower.
Sometimes the stock market can be up, even in the face of economic disaster. The U.S. economy was terrible in 2020 -- remember the Covid slump, with businesses shut and people unemployed? The stock market was up sharply for the year. A year that people remember as the "good times" of the pre-Covid Trump presidency, 2018 -- the era Trump brags about -- was a down year in the stock market.
This is a political blog, not a financial advice blog, so I will repeat my main point. Democrats can point to job growth, to low unemployment rates, to a growing GNP, and to the rebuilding of our domestic computer chip industry. Those are good things and there was a basis for talk of "Bidenomics," even if the public didn't feel it. There is ongoing progress on income inequality. Incomes for people in the bottom 20% of earners -- the working poor -- are outpacing inflation, welcome news for the people most hurt by the off-shoring of manufacturing. (But even that improvement has critics. Republican politicians and Fox News hosts complain about prices at McDonalds, and blame it on their workers getting $15/hour. Yesterday morning I watched Fox's Greg Gutfeld complain that $15/hour was far too high a wage to pay for easy, entry-level work like theirs.)
The stock market was at an all-time high on Monday. Monday was good. But Democrats should not set a potential trap and embarrassment for themselves. Assume nothing.
Can't trust the stock market or Monday, either one. It gives no warning. Sometimes it just turns out that way.
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Tomorrow: Guest post endorsement for district attorney in Jackson County, Oregon.
9 comments:
Politicians take credit when economic trends are good, cast blame when they are not.
How dumb are we?
Not long ago, Trump claimed credit for the record high stock market even though he's been out of office for over three years, so why shouldn't Biden? He is in office.
Presidents actually have little or no influence over the economy. Even in areas where the president can shape it — appointing Federal Reserve governors, steering fiscal and regulatory policy, responding to crises and external shocks — the relationship between presidential action and economic outcome is often uncertain and hard to prove. But historically voters tend to judge them based on how the economy has done during their term, so they take credit when it's good and try to distract us when it's not.
Chaos Theory tells us that chaotic phenomena like the stock market can exhibit periods of regular linear behavior, or even regular cycles; but these periods will appear and disappear with total unpredictability.
I e been an investor and a trader since the mid-'70s. There have been up years and dow years, but I don't recall anything a president did, D or R, that affected long term performance.
I've done well since then, and I certainly recall significant events in the world that caused significant rise, and significant decline.
My learning is to invest money that you plan to use for retirement, and live a lifestyle based on your income during your working years. Set a budget that maximizes savings each year. Maximize contributions to IRA, ROTH IRA, 401K, etc. Learn how the market works (or doesn't work!).
For me, I sat tight during major declines, and fortunately did better when things recovered.
The gyrations aren't for everyone. A strong stomach is needed.
If you want a sure thing, talk to a financial advisor. He/she will tell you what's possible and what can go wrong.
I plan to do OK no matter who wins in November.
Starting in the 1980s, as soon as it became possible, my wife and I consistently maximized our contributions to our IRAs. It wasn’t much money, something like $2,000 a year.
But thanks to compound interest, those IRAs have grown into an absolutely amazing amount of money 40-odd years later.
Sorry for the typos, but I think you got the gist.
I forgot to mention that I learned about the stock market from 2 people back in the '70s:
1. While working at Bethlehem Steel one summer between my sophomore and junior years at college, a coworker told me how the market worked during our breaks. Yes, we were both electricians, and I saw firsthand all the labor jobs that steelworkers did. My dad was a steelworker, too, and we were both union members.
2. While in the Army Reserves after graduating from college, a fellow reservist was a stock broker. I ventured into the market, buying Weyerhause and one other company. The latter one, I forgot the name, but it went nowhere, and eventually went bust.
In the late '70s, we were all warned that Social Security likely wouldn't be there when our generation retired in 45 years.
That indicated to me that I had better plan on funding my retirement. I read more, and more about investing, and how to maximize my returns. Don't forget during those early years in the late 70s and early '80s, interest rates and mortgage rates were in double digits. I maxed all retirement fund contributions for my wife and me. We figured SS would not be there for us.
Fast forward to early 2000s when we first became eligible for SS benefits. We both continued working until my wife turned 65in 2019. We had done well with our savings and investments, so delayed taking our benefits until we turned 70, maxing out our monthly benefits with that annual 8% bump by deferring our monthly SS benefits.
Saving, investing, working hard, and learning how the stock market can work for you can provide a very comfortable retirement.
PS No, I do not provide financial advice.
I suppose now the question will be what we ants should say to the starving grasshoppers.
Do you mean the starving grasshoppers eating avacado toast, getting tattoos and spending because FOMO?
Timely. Most indices down over 1% today.
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