“It’s tough to make predictions, especially about the future.”  - Yogi Berra

Investors face many risks whenever they put money into the capital markets.  Some risks are unique to the individual stocks or bonds they have purchased.  Will my Apple stock keep going up?  Am I over-concentrated in a just a few stocks?  What happens to the price of my 5-year Treasury Note when interest rates go up suddenly?  

Other risks are more big-picture:  Am I taking too much equity risk?  Am I adequately diversified?  Will my investment portfolio outpace inflation?  Will my nest-egg be sufficient to support my retirement years?  Will I outlive my money?  Will I be able to leave an inheritance to my heirs?  (Fortunately, your Coyle Financial Advisor is well-equipped to help you answer many of these questions.)

Another form of risk is market volatility.  Experienced investors are used to seeing down-side volatility in the stock market, with intra-year declines of 10% being a fairly common occurrence.  They understand that the market doesn’t generate wealth in a straight-line fashion like a perpetual bull market.  But even those investors can have their patience tested during a bear market, those long, protracted declines of 20% or more from the previous high.  Since the late 1960’s, the average bear market lasted about 15 months with an average decline of 38%.

This chart from Ben Carlson, CFA of Ritholtz Wealth Management LLC shows how often the U.S. stock market has been in a bear market by decade Notice the general decline in the time spent in bear markets since the Great Depression and that the decades of the 1990s and 2010s had no bear markets.

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Bear markets are often associated with economic recessions, and for good reason.  A decline in the production of goods and services in the overall economy directly impacts the financial prospects of many public corporations.  This leads investors to reduce expectations regarding prospective future corporate earnings and cash flows, which in turn leads to falling stock prices.

In this regard, Ben Carlson provides another helpful chart of the percentage of time spent in recession by decade [3]. Similar to the bear market chart, notice that the duration of recession time has also declined significantly over the decades, especially after World War II.  The 1990s and 2010s were especially prosperous economic times.

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By now, astute readers will make the obvious connection that, if we can predict economic slowdowns, we can avoid the associated decline in the stock market.  Alas, if only it were that simple.  Professional economists are well known for equivocating their forecasts, saying “on the one hand” certain things could happen, hedged by certain other things that could happen “on the other hand.”  (This led President Harry Truman to quip that he only wanted one-handed economic advisors.)

Forecasting future events of any kind is a fool’s errand:  how many people foresaw the fall of Communist Russia, or the Global Financial Crisis or the COVID pandemic?  Researcher Philip Tetlock once studied the accuracy of professional forecasters across several fields of endeavor, including economists [4]. The experts who said they had 80% or more confidence in their predictions were correct only 45% of the time.  That’s a coin toss for you and me.

Allow me to close with a recent example. I looked back one year ago at what economists were forecasting for the U.S. economy and markets for the calendar year 2024⁵.  One-fourth of the surveyed economists thought that recession was likely, although the majority thought that real GDP growth would come in at a less-than-robust 0.5% to 1.5%, with almost a 50-50 chance of recession.  Most of these economists thought unemployment would rise as high as 5% and the 10-year Treasury rate would fall to as low as 3.25%.  They also thought the S&P 500 Index would end the year somewhere between +4% and -10%.

By contrast, an optimistic, but small, number of those surveyed thought that the U.S. economy would grow at close to the 20-year trend of 2.1%.  They also thought unemployment would stay a little below 4%, the 10-year Treasury rate would rise to as high as 4.5% and the stock market would be up +10%.

What were the actual year-end numbers for 2024?  Real GDP increased +2.8%, unemployment was 4.1%, the ten-year Treasury rate was 4.5% and the S&P 500 Index rose by +25%.  Thus, the economic optimists prevailed.  But even they underestimated economic growth and the stock market returns.  Needless to say, there was no recession.

If, as the famous Doris Day song lamented “the future’s not ours to see”, and forecasting is notoriously unreliable, where can investors look for confidence to stay the course in spite of the risks?  While nothing can give us ironclad guarantees of investing success, understanding U.S. financial history, underpinned as it is by the fruit of capitalism, free markets, the rule of law, property rights and the entrepreneurial spirit, gives us the best hope that we can meet our financial goals in the long run.

I close by showing this chart of calendar year returns on the S&P 500 Index since 1950, which captures the idea pretty succinctly The historic wealth creation of the U.S. stock market has been remarkable, to say the least.

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