by Robert E. Quittner, Jr. CFP® & CMFC™
Investment Advisor Representative
[email protected]
Not sure what happened to January. A few short weeks ago when Kyle and I were analyzing our portfolios, I was thinking about how good the markets were in 2023 and 2024. Both years the S&P 500 was up over 20%. While this was great for everybody’s portfolios, I wondered how much longer this could last and what the odds were of another great year. To satisfy my curiosity I ran some analysis going all the way back to 1928.
Historically, periods where the S&P 500 has returned over 20% in consecutive years are relatively rare. The first string of years where this occurred spanned 1942 to 1945.
-1942: 20.34% -1943: 25.90% -1944: 19.75% (just below 20%) -1945: 36.44%
These returns were driven by 4 key factors:
- World War II: The ongoing war had significant impacts on the U.S. economy and stock market. Key events such as the turning of the tide in favor of the Allies after major battles like Midway (1942) and D-Day (1944) boosted investor confidence. The end of the war in 1945 further solidified this positive momentum.
- War-Time Production: The ramp-up in industrial production to support the war effort led to massive government spending. Companies engaged in manufacturing military goods saw substantial growth, which had a positive effect on the stock market.
- Economic Policies: Government policies focused on stabilizing the economy during the war, including rationing, price controls, and wage controls. This stability helped maintain investor confidence.
- Technological Advancements: The war spurred technological innovations and productivity improvements, particularly in industries like aviation, engineering, and manufacturing, providing a boost to corporate profits and, consequently, stock prices.
The second string of years occurred during the tech boom and ran from 1995 to 1999
-1995: 34.11% -1996: 20.26% -1997: 31.01% -1998: 26.67% -1999: 19.53% (just below 20%)
The dot-com era was characterized by a rapid expansion of Internet-based companies and speculative investment in the technology sector. Here are the key events and factors that define this period:
- Rise of Internet Companies: The commercialization of the Internet led to the creation and rapid growth of numerous online businesses, commonly known as dot-coms.
- Speculative Investment: Investors were highly optimistic about the potential of technology and Internet-based companies. This led to significant speculative investment, driving up the stock prices of both established firms and startups, often without regard to their actual profitability or business models.
- Initial Public Offerings (IPOs): Many dot-com companies went public with highly valued IPOs. These IPOs attracted substantial investment and shares often saw sharp increases in value shortly after being offered.
- Lack of Profitability: Despite high valuations, many dot-com companies were not profitable. The business models of some of these companies focused on rapid growth and acquiring market share, often at the expense of sustainability.
This speculative journey wasn’t sustainable and by early 2000, it became apparent that many of these companies would not achieve the profitability and growth expected by investors. Confidence in the market decreased, leading to a sharp decline in stock prices, commonly referred to as the “dot-com bust.”
From the peak in March 2000 to the trough in October 2002, the tech heavy NASDAQ Composite lost nearly 78% of its value. Numerous dot-com companies went bankrupt, and the technology sector experienced widespread layoffs and consolidation. Despite the initial collapse, some companies, such as Amazon, eBay, and Google, survived and are still dominant players in the tech industry today.
The dot-com era serves as a cautionary tale about speculative investment and the importance of sustainable business models, but it also marked the beginning of the transformation of the global economy through technology and the Internet. As a side note crypto falls into this speculative arena.
I mentioned cycle in the title of this article and one cycle in the financial markets and statistical analysis is referred to as “Reversion to the mean”. Simply put, this theory suggests that asset prices will eventually return to their long-term mean or average. The average annual return of the S&P 500 over the last 50 years was 10.5%. Given all the varying factors in the political arena, taxes, inflation, immigration, overvalued tech stocks and AI, I’d be happy with an average rate of return this year.
Stay warm, relax and enjoy a weekend with no football. Save your energy to root the Birds on to another Super Bowl win next weekend!
Rob