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A Little Perspective

I love Morningstar.com.  For a modest annual fee, they offer great market data and company information.  Here's an interesting chart which I took from their website.  It shows the growth of $1 in the stock market from the end of the Civil War until today, and includes some of the historic events which pushed the market around.


Source: Morningstar.com


I like analyses which take a long perspective, and here we have a good one.  $1 has grown to $15,000 today.  The chart illustrates an old adage: "The market climbs a wall of worry."  No matter the news of the day, which was sometimes abysmal, the market dips were always temporary.  The advances were permanent.


I see two further things to mention.


1) This chart is plotted on a log scale, which permits us to inspect the detail at every point in history, and to see how certain events affected stock prices.  Useful.  If we plotted the information on a linear scale, the line would crawl along the bottom of the chart, and then shoot to the sky just in the last few years.  But a log scale also understates the severity of market crashes when they occur.  The dips all look rather harmless.  But that large-ish dip in 1930 was actually a crash of 90%.  The market took years to recover.  So, although, as I say, the dips are temporary, they are sometimes severe and require patience to recover, a point which this chart does not convey.


2) The chart only mentions bad news.  They're trying to make a point.  But for amusement, here's a partial list of good news over the same period: the invention of the light bulb, the car, the airplane, vaccines, computers, our victories in World Wars I and II, the peaceful end of the Cold War, the opening to China in the 1970s, a mostly uninterrupted world peace dating from 1945 until today, improvements in equal rights, starting with the abolition of slavery, the growth of global trade, and humongous improvements in global health and life expectancy.  The list goes on and on.  The good news far outweighs the bad news.  We as individuals don't really notice good news daily, in part because we read much less of it in the press.  (I personally think that we are all programmed for bad news, and the press merely caters to our preferences.)


But the stock market notices, and it moves upward accordingly.  Every one of those good news items created a profit opportunity for one firm or another, or for all of them.  The stock market responds to profit.


I'm tempted to leave it here and wrap up.  Good news and profits go together.  Good news outweighs bad news.  The stock market moves ever upwards.  But the real picture is more nuanced than that.


Bad news and profits go together also.  Companies, sometimes working with government, respond to the problems of the day and find solutions.  Something like this is going on with regard to the coronavirus.  Coronavirus, which is unambiguously bad, has created profit opportunities - lots of them - for companies such as Amazon, Salesforce, Google, Microsoft and the like.  They have greatly eased our transition to working remotely, meeting remotely, studying remotely, etc., and allowed many of us to work through the crisis.  Taken together, these companies represent a big and growing slice of our economy, with booming profits.  And I haven't even mentioned the race to find a vaccine, or to reform healthcare to better handle the crises of the future.  To those who ask me how the market can do so well, and recover so quickly from its panic, when we have just wiped out all of the job gains of the last decade and face the worst economic crisis for multiple sectors in decades, I think this has some explanatory power.  


This also, to my mind, explains more fully why market dips are temporary and the advances are permanent. Not only does good news outweigh bad news, we have a mechanism to turn bad news into good news.  The mechanism is profit motive, a strong force for finding solutions.  Under these rules, bad news doesn't stand a chance, although it sometimes puts up a good fight.


You may protest that beautiful parts of our old way of life, including vacation cruises, all college life, big splashy weddings, funerals, business conventions in Las Vegas and backyard barbecues with friends and family, have just gotten crushed.  In the future, we'll have much less direct human interaction, perhaps wearing face masks, and more screen time (if possible), a catastrophic development in my opinion.  The stock market, even if it weighs profits accurately, doesn't measure that.


It may not measure the problems, it measures the solutions - in this case a vaccine and other healthcare improvements.  Still, I admit, the old ways have taken a hit.  The things which return will have to do so competitively.  I'm cautiously optimistic for cruise lines.  It's hard to take a cruise on your computer.  It's much easier to go to college on your computer.  The college campuses which return successfully will need a compelling offer which you can't find online.  I hope that they focus on their strengths in human interaction, not only in classrooms, but in dormitories, dining halls, sporting arenas, and elsewhere.  I look forward to seeing my clients and friends also, and not just over the dumb computer.


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