Jun 22, 2022 8:09:40 PM / by Jonathan Blau



Jonathan R. Blau – June 22, 2022

This is a question recently asked of me by a client.  I wanted to share my answer in this newsletter as I believe it speaks volumes in a personal way. I left the “Big 6” accounting world in 1996, at the age of 29, to join what was then the largest privately owned money management firm in the US, Sanford C. Bernstein. I was in a 6-month training program and outside of training my sole responsibility was to build a new money management practice from scratch.  My training and hard work had paid off -- by January 2000, I had managed to raise my first $100 million.  Unfortunately, the worst bear market in generations was around the corner and by October 2002, the market completed one of its worst two year slides declining about 50% from its high.  Ever resilient, I picked myself up and started working harder to rebuild.  By mid-2007, my client assets totaled almost $400 million and then, in the blink of an eye, the market declined by close to 50 % AGAIN by March 2009!  A very smart person with whom I was close advised me reconsider falling back on accounting and to accept the “unstable nature of my chosen career path.”  Thank goodness I had the patience, discipline, and faith in the future not to listen!  In mid-1996, the S & P 500 was about 650.  It experienced a halving in value twice in my first decade as a wealth manager (one of the worst showings for any decade in modern history).  The dividend was $14.  Today, the S & P 500 is close to 4,000 and the dividend has grown 4.5 times.  $1 million invested when I began in 1996 is now worth about $6.2 million and pays dividends of about $90,000.  The consumer price index was 156 and is now 292. 1  In other words, having begun investing for clients at the onset of arguably the worst decade for stocks in modern times, inflation was up less than 2x, the value of the stocks was up over 6 times, and the cash dividends were up almost 5 times.  I was able to help many families protect and grow their wealth in the face of seemingly insurmountable geopolitical, economic and market circumstances.  My family is my personal life blessing, and my career and clients are my professional life blessing.  Few things are more rewarding than to be able to have created my own wealth by helping so many families to protect and build theirs.  How can such an experience lend itself to anything but optimism?  Optimism is the only realism that reflects the entire historical record.



 For the record, while the media carps about inflation at a 40-year record high, it was about 2 times higher about 43 years ago – hitting 14.8% prior to Fed Chair Paul Volker raising interest rates to a peak 20% in June 1981.

On August 13, 1979, the cover story of BusinessWeek was THE DEATH OF EQUITIES: HOW INFLATION IS DESTROYING THE MARKET.  Individual investors were exiting the market en masse, leaving the stock market’s fortunes largely in the hands of giant institutional investors.  Further the Employee Retirement Income Security Act of 1974 (ERISA) liberalized the definition of what could count as a prudent investment for pension funds to include, real estate, commodity futures, gold, and diamonds.  These are all of the types of assets thought to offer a hedge against inflation.  I will leave the argument as to their efficacy as hedges for a future article.

 The main point is that many of the alleged experts in the fields of economics, investing and government simultaneously made the same grave behavioral mistake of extrapolation! They advised (extrapolating rising inflation into eternity) that just as inflation was about to end – investors should buy things that worked in 1970,  had one bought them 10 years earlier.  The S & P 500 came into 1980 (the 1st year of the new decade following the eve of BusinessWeek’s stock market indictment) at about 100.  $1 million invested in the S & P 500 on the eve of that indictment is today worth about $40 million.  The cash dividends received on the $1 million in 1980 totaled about $50,000 and today are about $600,000. 1  Inflation, as measured by the consumer price index in 1980 was 77 and today is 292.  Gold topped out at about $800/oz. in 1980 and today is $1,841/oz.


To summarize, in the roughly 40 years since inflation was heralded as an immortal stock killer, it rose by under 4 times.  Stocks rose 40-fold, cash dividends rose 12-fold and gold rose about 2-fold. And the media, gurus and all manner of alleged industry experts suggest that stock investors should somehow fear current inflation and seek out better inflation fighting investments than stocks.

Pease read the August 1979 BusinessWeek article linked here.  It is a MUST READ for any investor concerned about inflation, rate hikes and the future viability of stocks



 In 1898, delegates from around the world met in New York for the first international urban planning conference in world history. The meeting, which was scheduled to last ten days, was occasioned by a staggering crisis in the world's urban centers: horse manure.

The largest cities around the globe were clearly hurtling toward disaster, as the growth of the horse population outstripped even the rise in human city dwellers. To the point where, in 1894, the Times of London quite seriously estimated that by 1950 every street in that city would be buried nine feet deep in horse manure. One contemporary forecaster in New York had concluded that by 1930 horse manure would rise to Manhattan's third-story windows.

The conferees quickly arrived at the conclusion that the crisis was utterly insoluble, and the meeting broke up at the end of the third day.  Hold that thought, while I remind you that on present trends, supply chain dysfunction, inflating energy, and food costs along with rising interest rates and deflating stock prices will cause most of us to run out of money.

What do horse manure at the turn of the twentieth century, current inflation, supply chain issues, rising interest rates and persistently declining stock prices have in common? Answer: they were/are on unsustainable trajectories. What, then, do we conclude?  Answer: that their trajectories will not be sustained. Herbert Stein, chairman of the Council of Economic Advisors under Nixon and Ford, famously observed: if something cannot go on forever, it will stop.

It is this belief which unites all of us whose view of the future is summed up in Shakespeare's four magical words, “What's past is prologue.” The world's cities did not, in the event, disappear under a tsunami of horse poop. Inflation will abate, the supply chain will normalize, interest rates will stabilize, and stocks will stop declining and likely do the only thing they have ever done – move to new all-time highs in price and dividends! We don’t need to—and can’t—know how and when these welcomed developments will take place; we simply have to continue to know that they will.

The diametric opposite of Fusion’s belief—the contention that the current crises are somehow unprecedented and insoluble, and that we are driving toward the edge of the Grand Canyon stepping on the accelerator with eyes wide shut—fuels all catastrophism. This is a delusion with a rich tradition going all the way back to Malthus, and probably even further. The only road to Armageddon is the Extrapolation Highway. 

"Hence it is that, though in every age everybody knows that up to his own time progressive improvement has been taking place, nobody seems to reckon on any improvement during the next generation. We cannot absolutely prove that those are in error who tell us that society has reached a turning point, that we have seen our best days. But so said all who came before us, and with just as much apparent reason. ... On what principle is it that, when we see nothing but improvement behind us, we are to expect nothing but deterioration before us?"

Thomas Babington Macaulay – British Secretary of War – Circa 1840



Let’s first revisit some facts about corrections (declines of at least 10% from a previous high), bear markets (declines of at least 20%) and recessions (two consecutive quarters of economic decline):

  1. Since 1980, there has been an average peak-to trough correction of nearly 15%, annually.  
  2. Since the end of WWII in 1946, we have had about 60 corrections (1 every 13 months) and 14 bear markets (with declines averaging 30%) with one occurring every 5-6 years. 
  3. During these 74+ years when stocks were correcting 60 times and experiencing 14 bear markets, the S & P 500 soared from 15 to almost 4000, an increase of about 270 times (the dividend went from 70 cents to $63, up about 90 times).  A $1million investment in stocks went from paying a dividend of $47,000 to paying over $4 million now and the value of the $1 million today is approaching $300 million! 1
  4. During these 74+ years while the economy was experiencing 12 recessions (we experience one about every 6 years), real – inflation-adjusted -- GDP (total value of US economic output) went from $2 trillion to about $23 trillion.  That is a multiple of more than 11 times in a country whose population has grown less than 3 times, so real GDP growth per person has been extraordinary.
  5. Bear markets tend to be short-lived.  The average bear since 1929 has lasted less than 10 months and declined about 35%.
  6. Since WWII, the average time from a peak in the market, to a trough and back has been about 3 years
  7. In the past 20 years, 60% of the market’s strongest gains took place in bear markets.  Another 32% of the strongest gains happened in first two months of the new bull – before we knew the bull had begun.

What I find most remarkable about the current bear market is how utterly unremarkable it is, in the context of the severity of past bear markets ( S & P 500 is down 22% and the average bear has historically been down by about 1/3) and how remarkable the overreaction to it is from investors.  In recent meetings with clients, I have found that the convergence of four anxiety-inspiring events -- inflation, recession fears, rate hikes and war – have actually had the effect of causing investors to feel and to believe that the current decline in their portfolio values is worse than they can remember at any time in recent history.  They believe this notwithstanding the fact that just over two years ago the S & P 500 was close to half of todays level.  Moreover, the S & P 500 began 2021 at 3,695.  As I write, it stands at 3,800 (5% HIGHER THAN WHERE IT BEGAN A YEAR AND A half ago)!  Extrapolation has much to do with current anxiety as does the irresistible urge to sing the four word death song of the American investor: “THIS TIME IS DIFFERENT.”  Investors, generally, are having a black swan (events that are rare & unpredictable with extreme consequences) reaction to a white swan event.

In the meantime, back here on earth, US household net worth is near all-time highs with a good portion of that wealth in cash equivalents (last quarter, JP Morgan reported that cash number to be close to $15 trillion).  Corporations are also flush with cash.  According to Nick Murray Interactive, in May, corporate cash levels were $1.5 trillion pre-pandemic and recently approached $1.8 trillion.  This is great news for our clients since companies have continued to raise dividends to all-time record high levels.  Corporations are also on pace to buy back shares at a record pace, expected to approach $1 trillion in 2022.  This is a boon to the value of long-term investor portfolios and a meaningful sign of corporate America’s confidence in the future prospects for business and our economy..

Finally, as I have been counseling for the better part of the last decade, we are in a secular (roughly two-decade long) bull market that began in March 2009.  It recently celebrated it’s 14th birthday.  Investors have been net-sellers of stocks for most of the 14 years and last week’s American Association of Individual Investors (AAII) sentiment survey revealed that 58.3% of investors expect the market to decline over the next 6 months. That reading is twice as pessimistic as the average bearish reading of 30.5% since the survey began in 1987.  THESE GREAT BULL MARKETS HAVE NEVER ENDED ON EXTREME PESSIMISM.  Rather, they end when there is one fear that dominates the investor landscape -- the fear of missing out (FOMO) on the next equivalent of the dotcom bubble, that will consume the focus and energy of our entire nation.  Our view is that we are likely many years and thousands of S & P 500 points away from that.  WE VIEW TODAY’S MARKET LEVELS, GLOBALLY, AS A GENERATIONAL BUYING OPPORTUNITY.  Investors intentionally holding cash will likely regret that decision and likely sooner than later.  When we see investors record cash levels begin to chase the next broad bubble and when investor’s are partying like it is 1999 (feeling they can’t lose by pumping all their money into tech stocks), we will advise pulling back.  Until then, we must continue to march.

Without meaning to pile on my optimism, given the continued level of investor overreactions to normal market occurrences and the persistent level of pessimism this many years into the greatest bull market in history, I believe that this bull market may actually be much younger than I thought and with even more years and room to grow than I have been saying for the better part of this decade.

Wishing everybody a happy, healthy, and fun summer!


Data from: : The S&P 500 at your Fingertips



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Written by Jonathan Blau