If Rip Van Investor had fallen asleep at the start of the 20th century, and woke up with a yawn 100 years later at midnight, December, 1999, he would have been startled to see that his investment in the S&P 500 had gained more than 10% a year, on average, during his 100-year nap. He might fairly have concluded that he’d slept through ten decades of happiness, sunny economic climate and smooth sailing, when in fact the century included two horrible world wars, the Great Depression, the Vietnam and Cold War, both a presidential assassination and impeachment, and truly disturbing fashion trends like men’s bell bottom jeans. In the midst of these events and stable growth in the U.S. economy, there seems to be a long-term disconnect between world events and the behavior of investment markets.
2011 proved to be a less drastic version of this important investing lesson, strange as it may be. If, like Rip Van Investor, you had slept through the entirety of 2011, you would have woken up to stocks that remained basically unchanged. The Standard & Poor’s 500 index, for example, finished the year exactly 0.04 points below its level prior to the opening bell on January 1, 2011 (actual performance before divdends).
That means it was a boring, uneventful year for investors–right?
In fact, this less-than-inspiring stock market performance was achieved in the most eventful way. In 2011, we watched the European Union teeter on the edge of collapse, the sovereign debt contagion spreading from Greece to Spain and Italy. Amid the Arab Spring uprisings and regime changes in Egypt, Tunisia and Libya, constant tensions over the nuclear program in Iran, the terrible tsunami tragedy leading to a nuclear catastrophe in Japan, and the recent unpredictable regime change in nuclear-armed North Korea, it seemed like every other week there was a reason for investors to believe that the markets would finish 2011 well below their pre-crisis levels.
It’s true that portfolios that held foreign stocks would have shown overall losses for the year. But the bigger picture, here in the U.S., is: Why is there such a broken connection between tragedy, political turmoil and scary headlines, on the one side, and market returns on the other? The answer may be that the underlying forces driving our economic growth are more stable than the headlines suggest. Quietly, despite the best (or worst) efforts of Congress, the U.S.unemployment rate has steadily declined from over 10% at the peak down to 8.6% last month, its lowest level in three years. Factory output is rising, consumer spending has been surprisingly strong, and for the first time in decades, the U.S. is a net energy exporter.
World events have gotten more complicated, more interesting, sometimes more disturbing, so much so that it takes a bit of perspective to see the long-term trend behind the scary headlines, behind the dips and swirls of the markets. The major U.S.market indices avoided a downturn in 2011 after two strong recovery years. Those who bailed out after the market took any of its many tumbles would have risked missing the year’s many improbable, unpredictable recoveries. Rip Van Investor came out all right–and suffered a lot less anxiety than the rest of us.