As we go to press late in this very interesting year, I thought a look back in time to Octobers of the past might be interesting, especially since this is the 10-year anniversary of the Great Recession. This is the last quarter in which the losses from all six of the bad quarters of that bear market will hold down our 10-year returns.
It was an interesting little journey for me; I recommend you try it sometime. Wandering through the past, looking at major events — good and bad — for a particular month, and perhaps for some even number of years, was a lot of fun. I decided to start with 100 years — a nice round number, and a busy time for the world. Events from wars to music accompany economic and market events; I tried to mix it up and keep it short and interesting. I hope you think I succeeded at that, and as always, I would love to hear from you.
Octobers in Recent History
One hundred years ago this month, two legends of jazz were born: Thelonious Monk and Dizzy Gillespie. Born in just the right time and place, these two men changed the world of music forever. I am listening to Monk right now. Give them a listen, and try to look at the bright side of things!
On a less cheerful note, that same month saw the takeover of Russia by Vladimir Lenin, Leon Trotsky and the Bolsheviks (no, not a punk band, unfortunately), leading to many decades of death and suffering on a massive scale, unprecedented in human history.
That year also saw the entry of the United States into the First World War, a year before the worst war in history (up to that time) concluded with the surrender of Germany and the ill-fated Treaty of Versailles.
Germany and the Soviet Union complete their conquest of Poland — begun barely a month earlier — launching WWII.
The Miles Davis Quintet — which included then little-known John Coltrane on tenor sax — completed the second of two sessions for Prestige Records, subsequently released in four albums which established their reputation as the first “great quintet.”1
Sixty short years ago — seems like yesterday — several events occurred, which would have long-standing impact:
– Soviet Union launches Sputnik 1, the first artificial satellite to orbit the Earth
– Ayn Rand publishes “Atlas Shrugged”
– Toyota begins exporting cars to the U.S.
Forty-eight years ago, the so-called “Amazin’ Mets” — who spent their first seven seasons as the undisputed worst team in baseball (and perhaps the worst team ever) — won 100 games to overtake the Chicago Cubs, and then proceeded to win the World Series against heavily favored Baltimore. You never saw anything like it!
In another event of major military significance, I reported to U.S. Marine Corps Officer Candidate School in Quantico, Virginia.
October 19, 1987
Thirty years ago. Black Monday. Where were you? We all remember, in this business. I was looking at screens early in the morning, before dawn, watching the prices of Eurodollar futures moving like I had never seen before. Imagine watching cars driving 500 MPH! Happily for us, they were moving in our favor, and we closed out substantial positions with major gains before breakfast that day.
On the other hand, at the end of the trading day, the Dow crashed — the largest one-day decline in percentage terms ever, over 22%. In one day. And overseas equity markets were even worse. For months after, financial markets — and those of us in them — seemed to be suffering from PTSD, literally. I lost my appetite and couldn’t sleep. Futures pits in Chicago were deserted. One broker joked that the S&P 500 futures pit had one guy standing in the middle, tossing a baton in the air.
The good news is that equity markets rebounded sharply! Staying invested and rebalancing by buying equity at that scary moment paid off handsomely. The long-term investor has to weather these storms from time to time.
October 13, 1989
Black Friday (the 13th!) — A.K.A. the “mini crash.” A lot smaller than Black Monday, but enough to get your attention; and unfolding events soon thereafter led to the collapse of the junk bond market, and to the end of Drexel and the jailing of its “Junk Bond King,” Michael Milken.
Needless to say, equity markets rebounded nicely thereafter, and long-term investors continued to do well. Even the junk bond market recovered!
Twenty years ago. The Asian crisis began with the Communist Chinese government taking over control of Hong Kong earlier in the year, followed by an equity market crash in October. Asian currencies collapsed and a credit crunch ensued.2 Ultimately in 1998, Russia defaulted on its debt, and Long-Term Capital, a huge hedge fund, collapsed, endangering the entire financial system. These were interesting times.
Needless to say…
October 1999, 18 years ago, an intrepid little band left another firm and formed what is now Hewins Financial Advisors, mere months before the end of the tech boom (an unprecedented rally in U.S. equities). Those poor fools — headed into the teeth of the tech bust and a three-year bear market, which included, sadly, 9/11. If we had only known!
October 2007, 10 years ago, we entered one of the worst bear markets in our history. Well-described in “The Big Short” by Michael Lewis (see our letter from January 19, 2016), real estate markets essentially collapsed, and a variety of highly rated asset-backed securities — full of bad mortgages — did the same. We embarked on six consecutive quarters of substantial losses in equity markets — one worse than the next — as the financial system itself seemed to teeter on the brink of oblivion.
Needless to say…are we starting to sound like a broken record? Every crisis seems to have its own causes and characteristics — but in the end, they all seem to resolve in similar fashion, despite all the troubles of the world.
As of now, October 2017: when we look at 10-year return numbers for equity indices, we are looking at a period which started with the 1 ½-year bear market of 2007-2009.3 When we look at the S&P 500 for that entire 10-year period, we see a return of 7.16%. The first year-and-a-half saw the S&P 500 cut in half, but then it recovered so that the 10-year return actually looks like a fairly normal 7% plus.
That 7%-plus return is what the long-term investor gets by weathering the storms. Simple to say and understand, difficult to do, but essential for long-term success.
We should also acknowledge that this was an even more difficult decade for international and emerging-markets equities, which earned just over 1% annualized — a poor showing indeed. It was a difficult decade, no question. You might recall many pundits were suggesting overweighting these equities and underweighting the U.S.; it is a very good thing we don’t listen to that dribble. We recognize that these things are virtually impossible to forecast, no matter who you are.
More recent equity numbers are quite a lot cheerier. For five years, we see the following:
S&P 500 14.23%
Russell 2000 Small Cap 13.79%
EAFE International 8.38%
Emerging Markets 3.99%
Year-to-date 2017 is also quite good, and international is now outperforming:
S&P 500 14.24%
Russell 2000 Small Cap 10.94%
EAFE International 19.96%
Emerging Markets 27.78%
Meanwhile, for the entire period, bonds did reasonably well and provided the “anchor to windward” during difficult times that helps reduce overall portfolio risk and makes weathering the storm something we can bear.
I hope you enjoyed our little trip down memory lane!