Am I stupid for not worrying too much about the stock market downturn?

by philg

Well, I know that I’m stupid, but I’m wondering if I should feel a little dumber for not tracking the stock market regularly. The S&P 500 (chart) is back to where it was in April 2014 (about 1800). It was about 1500 in 2007. If we adjust that 1500 for inflation we get 1715 in 2015 dollars. The U.S. economy is growing at about 2 percent per year (WSJ). If we start with 1715 and apply 8 years of growth at 2 percent we get 2009. So the market is down only about 10 percent from where we would expect it to be if the 2007 price was right. A 10 percent decline is no fun for investors but it doesn’t seem like a good reason to start digging a bunker. Maybe the 2007 price wasn’t right after all!

What about the stock market good times of 2015? We didn’t earn them with economic growth so we shouldn’t be surprised that they were taken away from us.

Readers: What do you think? Is there any reason to think this is going to another 2008-style bloodbath?

14 thoughts on “Am I stupid for not worrying too much about the stock market downturn?”

  1. So, one important thing to note is that the SPX (i.e. the raw S&P 500) is not really the right thing to look at. For multi-year comparisons, you really want the total return version of the index (SPTR in Bloomberg). This assumes continuous dividend reinvestment, which is a better measure. The S&P dividend yield has averaged around 2% or so for the last 10 years, which as you know is material when it comes to compounding. You can get this data from Yahoo here:

    https://ycharts.com/indices/%5ESPXTR

    As someone who trades stocks professionally, I have no better advice than: (a) no one can predict when these meltdowns happen, and (b) you did JUST FINE if you held your longs from the peak in 2007 to now.

  2. PN: Is the SPTR truly the right measure for comparing value? The S&P 500 in 2007 was expected to yield a stream of dividends going forward indefinitely. The S&P 500 purchased today is also expected to yield a stream of dividends going forward indefinitely. So wouldn’t SPX be the right way to look at whether today’s value is substantially different from yesterday’s value? (While of course SPTR would be the right way to answer the question “What if I had bought the S&P on Date X?”)

    Let’s compare the S&P to a machine that you might buy to work in your factory (capital investment in hope of realizing a return). If you wanted to check the price today versus in 2007 you wouldn’t also add in all of the profits that the machine would have generated from 2007 through today.

  3. DOW returned to 7500 shortly before the last 2 elections in which the incumbent was leaving. The problem may be the fed’s stated position of not interfering with elections, thereby not creating the constant stimulus required by the stock market during elections. Prices are too far above incomes for private individuals to have any effect. Quantitative easing & foreign governments buying stocks directly are the only source of growth now.

  4. Are you worried that investors will just pull out money from stocks and put it into a bank account? But there is a well known fix – just slash interest rates to zero!

  5. When a patient is on life support, only the person who controls the life support machine can say what the patient’s vital signs will be. In this case, you must direct your bloodbath question to the Federal Reserve. When it comes to stocks, bonds, and the unfathomable derivative instruments, there is no longer a “market” in the sense that you learned in Econ 101.

  6. GDP is not necessarily a good indicator once you account for return on equity might be different from GDP for whatever reason – other areas of economy could drive GDP – government spending, real estate investment that doesn’t flow through to equities for whatever reason, or equity investment propensity – change in capital gains taxes for example (actually very little effect from studies I’ve seen). Then there’s the fact that S&P companies derive earnings outside US in substantial portion.

    A more direct way to look is just price to earnings for S&P: in 2007 the ratio was ~17. In 2015 at recent peak of S&P the ratio was 18.7, now that ratio is 16.61.

    No it’s not time to freak out yet, every time the stocks go on a long run up people worry they can’t buy anything, they want a pull back, then stocks pull back and everybody’s worried it’ll fall through the floor. You don’t need a great mind for investing, it’s the stomach that’s key (Or some such wisdom from Peter Lynch/Ben Graham/Buffet)

    Only two

  7. Your posts about airlines and the stock market has me thinking of starting a hedge fund designed to profit when there’s turmoil in the Middle East. How long do we all think Iran will avoid sanctions? How long will airlines remain solvent?

  8. Adherents to the Austrian School of economics generally hold that there has been no recovery since 2008. Massive mis-allocations of capital to unsustainable enterprises have not been properly liquidated since then. Fiscal stimulus and interest rate suppression has merely temporarily hidden the underlying problems and created new ones. They say the impending crash will be worse than 2008.

  9. Bobby: Austrians make some great airplanes (see http://www.diamond-air.at/ ) but I would have to disagree with them on the “no recovery since 2008.” Maybe that is true for the U.S. but there has been a lot of wealth creation in Asia, for example. The world economy has certainly grown, there are a lot of people with better standards of living and better educations. Even if none of those people are in the U.S., the S&P 500 can still get a lot of revenue and profits out of them.

  10. We will have to see what happens in Asia over the next few years. A lot of the “growth” in Asia and commodity exporting countries around the world since 2008 has been based on pseudo-government dictated debt in China, so the same basic criticism applies. A lot of this debt is quite obviously non-performing already.

  11. In short, yes, I believe there will be another stock market shock.

    Sure, the economy of the United States did have some growth that was natural, as opposed to artificial, due to various credit-based stimulus initiatives of the US government and of the Federal Reserve. However, that was a very small part of the total. Since nobody can live on borrowed money forever this will come to an end, sooner of later.

  12. Security prices make me feel stupid at all times, due to them always rising, at some point, above the price at which I sold the given paper, or falling, at some point, below the price at which I bought.

    That said, here are the experts’ votes that I’m aware of. “No big crash”:

    * Money managers to whom I entrust my money (with a low exposure to stocks)
    * Dean “housing bubble” Baker (assuming high P/Es are the new norm due to ZIRP)
    * Philip Greenspun

    “Crash ahead”:

    * Internet doomers (ZeroHedge etc.)
    * Robert Shiller (assuming P/Es will revert to the mean)
    * George Soros (short the S&P 500)

    No vote from “classical economics”/”efficient market” crowd, as usual (as you supposedly cannot predict price movements.)

    We’ll see how it turns out!

  13. Yossi,

    I always take issue with financial experts talking about p/Es reverting “to” the mean, as though the mean is a floor. In my view, things revert to and beyond the mean. Just a pet peeve of mine.

    I also suspect that the means mentioned in many current articles are inflated by looking at recent samples that exclude periods of more modest prices.

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