March 9, 2009, marks the bottom of the market during the Great Recession. Eight years later, we’ve come a long way, but from a very low base. Bronze is a customary gift for an eighth year of marriage, one we think most investors would deem appropriate for this bull market. It’s the second longest one on record (only the 1990s’ bull market surpassed it in length), but merely the fourth largest in terms of price advance.
This bull market, like bronze, has been viewed as being lackluster, however the reality is that the country much better off than it was eight years ago. Let’s not forget how far we’ve come as investors and as an economy since the depths of the Great Recession: Auto-manufacturing icons like Chrysler were declaring bankruptcy; the unemployment rate rose to around 10%; the S&P 500 Index was down 57% to an ominous 666; most major banks were underwater; and a peak of 2.8 million households submitted foreclosure filings.
Why has this bull market been so unloved? The recovery was uneven. Some investors recoiled from the markets when they were down in 2008-2009 and then completely missed out on equity growth. Since 2009, there’s been $760 billion in outflows from equity funds and ETFs while $1.5 trillion has poured into bonds. Further, on a dollar-weighted basis, the average U.S. equity investor has underperformed the Russell 3000 by about 500 basis points as of January 31, 2017. Put another way, an initial investment of $100,000 in the S&P 500 eight years ago in March of 2009 would’ve grown to $240,000 for the average investor based on their aggregate behavior, but $340,000 if it were just bought and held.
We attribute the underperformance of the average investor to a natural human defense mechanism: fear. Investors tend to only like one side of volatility (i.e., the upside) and run for the exits when things don’t go as planned. The fundamental issue with trying to time the dips is that the best and worst days tend to clump together. In other words, many good opportunities for returns have come right after the worst slumps. Consider that 8 of the best 20 price return days since 1928 appeared in the fall of 2008, and missing out on such days can be detrimental to a portfolio (Exhibit 1).
Chicago Mayor Rahm Emanuel put it well when stating that there “was no blueprint or how-to manual for fixing a global financial meltdown”. Given the circumstances facing the nation, credit is due to policy makers like Ben Bernanke who showed incredible aptitude in a time of crisis. It is nothing short of miraculous to see the health of the economy just eight years after the greatest shock to the system since the 1930s.
Mind you, companies in the United States look completely different than in 2009. Amazon hit a market low of $35 and is trading close to $850 now. Netflix was known for its DVD shipping service and was dreaming up this new thing called “streaming” (those who would become fans of “Orange Is the New Black” would have to wait two years). Mark Zuckerberg was three years away from the initial public offering (IPO) of Facebook and settling some multi-million dollar lawsuit with his roommates. Ford refused a bailout while trading at $4 (and is about $12 today). And Tesla was a year away from an IPO price of $17 a share (and is now about $250). Alibaba, LinkedIn, Twitter—all global staples today—weren’t available to the public for investing. Some didn’t even exist back then. The CEO of the latest unicorn to reach an IPO, now-billionaire Evan Spiegel, was testing out the job market as an unpaid intern at Red Bull. Today, some companies, such as Airbnb and Uber, still haven’t reached an IPO and yet have fundamentally changed travel and lifestyle.
Happy 8th anniversary, dear bull market. We wish you another year of growth, with hopefully more investors attending your party this time around.
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