Annual Commentary – 2017
January 4, 2018 – Why is the study of History so important?
If you are like many of us we did not necessarily hold those in college majoring in History in as high regard as say those in architecture, finance, medicine, etc. History majors were thought to be “safe” and not looking to the future. After all, what could they do other than teach a new set of history majors?
Well the study of history is very important. Have you ever heard the phrase “if you don’t know where you have been how will you know where you are going?” After all, History is merely the study of human behavior so until that behavior changes in some meaningful way the adage that history repeats itself will continue to hold a great deal of truth. So why this discussion of history?
As of today, the Dow Jones Industrial Average (Dow) just broke through 25,000. This index tracks the stock price movement of 30 of the country’s largest companies and is an indicator of the overall strength of the US economy. I heard a commentator on CNBC this morning say that he “called it” a year ago, i.e., the Dow would hit 25,000. (Actually what he said was that the Dow would hit 25,000 before Bitcoin but nonetheless Rick Santelli was trying to take credit for calling Dow 25,000.) Well for people who have been clients of Cashman Consulting, you know that we made that call many years prior. Specifically at our client seminar on May 15, 2013 we made the call that the Dow would hit 25,000 within 10 years. At the time few believed that could happen and the feeling was that we were “overly optimistic”. So why did we make that prediction?
Going back to May 26, 2010 the Dow stood at 9,974 and at our Client Seminar of that day we introduced the Next Ten Theory. This is where you look at the stock market performance for the prior ten years and analyze what happens in the next ten years. Specifically we were examining the performance of the stock market after periods of underperformance. From 1999-2008 the stock market, as measured by the Standard & Poors 500 Index (S&P 500), had an average annual return for those ten years of -1.38%. So we looked for other ten year periods with less than 5% annual average growth and found that the ten years after the lousy ten years did very well. To be specific the average annual return for the S&P 500 for the next ten years was 13.17%. By our seminar on May 15, 2013 the Dow had risen to 15,275, up 53% from May of 2010. Many at that time said that stocks were “way ahead of themselves” or that we were surely “Due for a Crash”. With that backdrop our prediction on that day was that the Dow would hit 25,000 by the year 2023. Well we were wrong, it happened much sooner!
So were we clairvoyant or what? I wish we could claim some supernatural powers or some super secret market strategy that pushed us to make that call but the answer is far more simple. History. That’s it, History. We looked at what had happened before and what was most probable to happen in the future. Based on that it made sense to call the Dow 25,000. While many will try and take credit for the Why? (mostly politicians) the truth is that economies and financial markets go up and down over time but the majority of the time up. Since 1925 the S&P 500 has risen 73.91% of the years. Add in to that the effect of low to relatively low interest rates and most importantly the impact of growing global market and the prediction of a rising stock market was actually pretty safe.
However, history does teach us that while stock markets do rise more than they fall there are still periods of market decline. Again looking at the period 1925-2017 this does happen 26.09% of the time. In addition, and as we have previously written, stock market corrections (a market decline of 10-20%) happen historically every 2 years. We are long overdue for this historic correction and as confident we were in 2015 we have that same confidence that a correction of some sort will occur within some reasonable time frame. When? Not sure but it is bound to happen. Stay tuned.
Past performance does not indicate future results. This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed by Kestra Advisory Services, LLC. as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. The S&P 500 is comprised of 500 stocks representing major U.S. industrial sectors and is considered representative of the market as a whole. Performance figures are inclusive of dividends reinvested. Investors cannot invest directly in an index. Standard & Poor’s Index data can be found at http://www.standardandpoors.com/home/en/us. Dow Jones Industrial Average monitors the performance of 30 large companies located in the United States.