Underreported And Ignored, Long-Term Economic Progress is Key to Investing

Print and television economic reporters spend most of their time reporting on short-term events, but the most important economic story over the last five years is one that is hardly reported on: the economy slowly improved. You hear about jobs reports, earnings reports, economic forecasts, currency declines, GDP revisions, and so on. It’s easy to get caught up in each event and find a new trend line each time something important happens. All these events paint a broader picture, however, and if we step back and look, we’ll see that the U.S. economy continues its slow progress.

As an investor, this story of progress is not just the most important story of the past five years, it’s actually the most important story of the last century. Looking back, this has been a time of recessions, market crashes, oil crises, bankruptcies, and frauds. But taking the long view we have seen steady economic progress. For most investors, including professionals, risk is hard to think about rationally because downside losses such as stocks crashes, stalled economies, and credit freezes happen suddenly. These types of events startle us and invigorate the media.

Gains, on the other hand, such as bull markets, economic expansions, or declines in cancer mortality rates progress slowly over time. Such slow progression is boring to follow and so it gets largely ignored. Using that progression, and enhancing it by making smart, value oriented, decisions, is by far the most powerful force in investing.

By the numbers, the most popular economic story of the last decade was the 2008 recession. And it was an important story; the recession cut the stock market in half and destroyed 9 million jobs. I’m sure it will be written about for many years to come (and rightly so). But the recession’s popularity doesn’t make it the most important story; by far, the most important economic story of the last decade is the recovery since 2009, in which the stock market tripled and almost 10 million jobs were created. Yet it’s received a tiny fraction of the attention. Many Americans don’t even know the recovery happened.

This dichotomy is common. The crash of 1987, when the stock market fell more than 20% in one day, is a cultural touchstone. It’s still referred to as Black Monday. There is, however, no formal title for the 102% stock market surge that took place in the two years before the crash, or the 65% rally in the following two years. There are no books written about it. It was the more powerful force, however, letting anyone in stocks more than double their money during this period, Black Monday and all.

Investors who look to this underlying strength are often those that have a longer time horizon. It may not seem like inaction is powerful, but waiting out negative events and allowing your investment hypothesis to play out over many years is the single best way to gain outstanding returns.

There has been no shortage of negative economic events in America over the last 160 years:

• 33 recessions lasted a cumulative 48 years.
• The stock market fell more than 10% from a recent high at least 97 times.
• Stocks lost a third of their value at least 12 times.
• Annual inflation exceeded 7% in 20 separate years.

Looking at these events, one might think this has been a time of economic suffering. Not so, our standard of living has actually increased 20-fold during this period:

It’s not about thinking that negative economic events won’t happen. Value investors understand that if you can wait long enough and have a sensible investment strategy, the odds of winning are in your favor. The trap that most investors fall into is having such a short time horizon that you’re forced to care about the negative events that happen in between.

2 Comments
  1. Hello Aram,

    I am in complete agreement that the media chooses to focus on negative, dramatic events over the steady improvement in GDP per capita growth. At the same time you should check the graph in this article:

    http://www.nytimes.com/2014/09/17/upshot/you-cant-feed-a-family-with-gdp.html?module=Search&mabReward=relbias%3Ar%2C%7B%221%22%3A%22RI%3A9%22%7D&abt=0002&abg=1

    It show the same GDP per capita line with median household income overlaid. For the last 16 years MHI has been flat or declining. This can only point to the increased wealth being generated from the rise in per capita GDP being concentrated at the top— and that is a trend that does not bode well for the long term health of our economy.

    Gary

    • Good point Gary. Concentration of wealth is a real problem for the economy, if current trends continue. Businesses, and thus stocks, need a strong middle class to generate profits, and without it, there would be hard times for most businesses. Fortunately, I expect the short term trends to even back out to a more favorable middle class. We have had a tendency in this country to have these decades of concentrated wealth, but sanity has prevailed and concentrations have diminished. Right now, we have problems with representative government that have allowed these wealth distribution problems to fester. I don’t expect our governing problems to last forever, when one party insulates itself from the majority views via gerrymandering and procedures, it creates a death spiral for that party that carries it father from the majority, until it reaches a breaking point and must either return to the center or face permanent minority governing status. We’re still a few years away from that, but that’s what I expect for the next decade. In the mean time, the trends will limit economic growth somewhat, but I still see a lot of strength in the current economic numbers.

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