A New Year’s Resolution for 2020: Say No to Negativity. This is Not 1999!
“You could invest in a company, take it public and cash out before you proved your business model” – Michael Barach (from 1999), former Venture Capitalist
After a wonderful 31.5% return in 20191, 2020 had a rocking start in early January due to some saber rattling in the Middle East. The stock market swiftly pushed through as cooler heads prevailed in both Iran and the United States. Following that start to the year, it seemed like there were few items to fear. We indeed experienced better than anticipated outcomes on the trade and Federal Reserve policy front in late 2019 and early this year, and first quarter earnings and economic data have had a very nice tone to them. Current trends in these metrics are supporting our thesis that earnings growth should re-accelerate in 2020 and the global economy is stabilizing.
Based on this better than feared fact set and data, the S&P 500 made a swift move to new highs, reaching the 3333 level in January’s third week. This high represented more than a 3%+ price gain2. We were barely into the new year and the index stood close to the low end of our 3350-3500 target for the S&P 500 for the full 2020 calendar year3. And then…headlines of coronavirus knocked the market back a bit to roughly the level where we stood on Dec. 31, 2019—flat for 2020’s first month.
While we are financial analysts not immunologists, based upon information available to us, we think this is simply a short-term issue that is manageable and should stabilize in a reasonable time frame from a market standpoint. This is our base case on this front at present. We most definitely empathize with all staffers laboring in China and in other countries to contain the virus and treat the infected, but like other health related “crisis events” (such as the SARS outbreak in 2003, Swine Flu in 2009 and the Ebola scare in 2014), we believe this will represent a buying opportunity as far as the financial markets are concerned. We are heartened that the mortality rate so far is well below other viruses such as SARs back in 2002/20034, the symptoms for most not much different than the common flu and that the medical community is quickly responding to quell its spread.
There is a big difference between a self-induced slowdown that may ensue in China as travel is postponed plus limitations that are placed on activities and public transportation, versus a recession that results from longer-term structural imbalances that have built-up in the economy and will take some time to suffer and correct. Investors can look through a temporary self-inflicted soft patch, rather than a structural decline in the economy. As with all other analysis that we conduct, we will look at the data to monitor the virus and will keep you updated. We will be looking for a peak in new cases and deceleration in the rate of new discoveries to signal when this situation has stabilized, and hopefully the worst is behind us. This data will signal the magnitude and duration for concern.
Our investment team did not see a potential pandemic scare being the headline issue that might inspire a pause in the S&P 500’s advance; no one did. But we did look for one of the several “wall of worry” items out there (election phobia, lack of conviction that the economic expansion can continue, fears that trade talks will melt down again, etc.) to create some heightened volatility this year and believed a pause was needed. The market needed some kind of check. Slow and steady wins the race. A temporary time out or pullback based on headline fears that occurs while the true underlying fundamental economic and earnings data remains positive, is healthy and sets the stage for continued market advance. This is part of the wash-rinse-repeat cycle that has expressed itself time and again in this bull market. The headlines scare everyone (wash cycle) and then the economic/earnings/policy data is released and investors see that it is either better than feared or absolutely good (rinse cycle) and the market rallies to new highs. We think this cycle remains in play in 2020. We do not look for the very robust returns of 2019 in 2020 but continue to see a positive trajectory in the S&P 500 with mid-to-high, single digit returns as the likely case.
In 2020, Say No to Negativity
At the turn of the year, I read a fantastic article in The Wall Street Journal that I would put on the recommended reading list for all investors. It appeared in the weekend edition on Dec 28-29, and was entitled, “For this New Year, Say No to Negativity.”5 The article suggests that instead of going on a low calorie diet as part of your resolution to be a better you, go on a low bad news diet.
The article highlights that human nature is such that each of us suffers from a tendency called negativity bias, something just discovered within the last several decades through clinical studies. In simple terms, we are simply negative creatures in our normal state. The article notes that we are much more impacted and influenced by negative experiences, information and interactions than we are by positive ones. Apparently, studies reveal that, on average, it may take four positive experiences to offset just one piece of criticism or negative moment. In studies cited in this piece, participants felt much more anguish from financial loss than joy from financial gain. Negative first impressions amongst those studied were far more memorable than positive first impressions.
The Wall Street Journal article comments that we are now quite familiar with the term post traumatic stress syndrome (PTSD), but few are aware of the positive effect of facing challenging conditions and the term, post traumatic growth. While I empathize completely with those who have faced such difficult life situations that induce PTSD, and am heartened that this is now openly discussed and treatment is available, it is very interesting that we share limited awareness of the character building and personal growth that is quite common from times of challenge and that this often experienced topic is rarely written about.
The major reason I bring this philosophical point up is that the traditional and digital media are very aware of our negativity bias, and I believe they prey on it. Negative headlines sell; positive ones—not so much! We need to be more aware of this as investors so we can appropriately counteract it and not be sucked in by it at the wrong moments. People have often asked how our investment team could be so positive on the S&P 500 going into 2019 and forecasting 24%+ returns6 when much of the world was preaching massive policy mistakes at the Fed and on the trade negotiation front, economic recession and an implosion in earnings? Why didn’t we drink the negativity Kool-Aid and run for cover based on December 2018 headlines that compared the then prevailing environment to 1931? Our answer is that we stayed grounded and focused on the fundamental, valuation and technical analysis that drives our investment decision-making, and this was all positive. Unlike many, we maintained a boldly contrarian, positive view of U.S. equities based on this data and embraced the very appealing valuation at the time—S&P 500 that had declined from 19 times earnings to only 13.5 times at Christmas7 2018—as a significant opportunity to hold onto attractive positions and upgrade our portfolios by adding to good stories that had been unduly punished by the uber crabbiness of investors. We feel so fortunate to work in a field in which optimism pays on most occasions. As the chart below illustrates, the S&P 500 is positive roughly 75% of the time.
Source: FactSet, Standard & Poor’s, J.P. Morgan Asset Management. Returns are based on price index only and do not include dividends. Intra-year drops refer to the largest market drops from a peak to a trough during the year. For illustrative purposes only. Returns shown are calendar year returns from 1980 to 2018, over which time period the average annual return was 8.4%. Guide to the Markets – U.S. Data are as of September 30, 2019.
The positive gray bars far outnumber the negative ones. It doesn’t generally pay to be negative on US stocks; negative calendar year stock returns occur, but they are relatively rare. We have no problem being negative, but the data sure better be negative to support being so or it will cost you significant wealth, in our view. We work hard to study the difference between signals of a temporary correction versus those of very nasty market tops. The former is simply part of the wash-rinse-repeat cycle that is short-lived. It requires poise and a willingness to recognize the buying opportunity it creates. This is far different from market tops generally associated with recessions and an implosion in earnings. Note the difference in the favorable earnings trends today versus the collapse in earnings that occurred at the bull market tops back in 2000 and 2007/2008. Unlike today, moments of earnings collapse seen in these prior periods do require defensive actions.
Great Decade in the Midst of a Sea of Negativity
It is worth noting that this negativity bias didn’t just express itself in 2019 when, ironically, the experts were suggesting selling stocks while the S&P 500 generated handsome returns of over 30% and virtually all assets posted results, including high quality U.S. bonds that rose almost 9%. Sadly, this headline-induced skepticism has lasted for more than the past 10 years and goes all the way back to the beginning of the recovery in March 2009. Investors were paralyzed over this past decade by misplaced fears of rising tax burdens, potential over-regulation, possible Fed policy mistakes, rising fiscal debt, etc. The consumer was supposedly in a cave for eternity and likely choking on debt forever. That was the common narrative in 2009. Actual result:
- Jan. 1, 2010 to Jan. 1, 2020 was the fourth best 10-year period for S&P 500 stock returns in the last 100 years8
- Millions of new jobs have been created; unemployment claims are at decade lows
- The S&P 500 advanced over 500% from March 9, 2009 to today; if you had $1 million in equities in March 2009 and merely invested in the S&P 500 index, your portfolio grew to $5 million today
- Consumer discretionary stocks were the best performing stocks in the S&P 500 during this period in spite of the pessimism about the condition of the U.S. consumer9
We were positive throughout this 10-year period. Again, we used our discipline in staying focused on the facts and the data to check the negativity bias!
The Wall of Worry—Your Negativity Bias Will be Tested Again in 2020
While we believe stock market returns will indeed be positive this year, we also believe that volatility will increase as the wall of worry items remain substantial. We think these items are manageable. Remember, we embrace the wall of worry. The existence of the wall signals that investors remain respectful of risk; we worry when there is no wall of worry! There is a reason the phrase, “bull markets climb the wall of worry” resonates so much with shrewd investors. So, what are the headlines that might tempt you to freak out this year? We will list a couple below:
- 2020 is “1999 all over again” – Even Paul Tudor Jones is making comparisons of today’s stock market to that of 1999. We feel this comparison is off base. The fact set was so different back then. The Fed funds rate stood at close to 6% in 1999, and the Fed was hiking rates, not fiercely accommodative like today. IPOs were exploding and more than double the levels of today. You didn’t need earnings or even revenues to go public at the time. A business plan and dot com in your name was good enough to lure investors. Earnings were in free-fall mode, unlike in a positive trend today, and some well-known companies were cooking the books…remember Enron and Worldcom? P/E’s on stocks like Cisco approached 100 and were 27 times earnings at the aggregate S&P level versus roughly 19 times currently. Hence our quote of the month above from a 1999 venture capitalist10.
- Election Train Wreck – Yes, we’ll hear a lot of election rhetoric as we always do in years of presidential campaigns, and each one has a different wrinkle. But much like 2016 when we heard over and over again that “this one is truly different,” we expect the 2020 campaign to be similar to the average election year regarding associated to market returns…flat to down market from April through October when we speculate about who will win and then the market rallies in November and December when we realize not much will change and uncertainty subsides. As long as neither party sweeps all three chambers—House, Senate and White House—gridlock prevails, generally to the market’s delight.
- Coronavirus – As for a closing comment on coronavirus, let’s put this in perspective for a moment, lest we get too negative too quickly and jump too soon to worst-case outcomes. Roughly 17,000 Chinese have contracted the virus so far and sadly several hundred have died. But, for context, at least 140,000 have been hospitalized in the United States this winter flu season with U.S. fatalities approaching 8,200…and this has been a mild flu season. So, again, let’s check the negativity bias and not jump to worst-case outcomes. Let’s follow the data.
Say no to negativity this year unless the data warrants…this can be a wealth creation mantra for the ages. We’ll keep you updated.
3Mariner Wealth Advisors 2020 Crystal Ball presentation
4JP Morgan Geopolitical Flashpoints (January 27, 2020) and https://bit.ly/2GVC8JW
5Tierney, John & Baumeister, Roy “For the New Year, Say No to Negativity”, Wall Street Journal (Dec. 28, 2019), pages C1-C2
6Mariner Wealth Advisors 2020 Crystal Ball presentation
8Wall Street Journal
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