On Monday, August 5, the Dow Jones Industrial Average was off over 1,000 points. Investors were in a snit. Investors sometimes get that way. This time, with the days of 0% interest rates and a wide-open Washington fiscal spigot behind us, their by-product, ruinous inflation, had been taking its toll. To get this inflation to a manageable level, the Fed had raised interest rates several times in 2022-2023 and had kept rates fairly high. Now, as August 2024, got underway, the Fed was being blamed for harming the economy.
Investors were in a snit and started selling stocks. As always, everybody loves a good, inflammatory headline, and the headline writers were having what turned out to be a short-term field day. With gloom-and-doom in the air, how should we (all of us) react? Well, the question has come up before, and the answer always is the same.
November 2000. The dot.com era finally came to a screeching end – the dam finally broke. No question, the Internet was going to revolutionize our lives, but investors, as investors frequently do, carried things way too far, way too fast. The low-quality, Internet-related flotsam coming to market in 1999-2000 and the overall feverishness finally tipped the scales, and the sellers took over in earnest. The NASDAQ Composite, then and now where most concept-type Tech stocks reside, had a one-month loss of almost 22%, and even the more broadly-based S&P 500 lost 8%. Day-after-day, as we watched the drama on our computer screens, the operative question: How should we react?
October 2008. What had begun a year earlier as a problem in one part of the mortgage market had morphed into a full-blown credit crisis and consumer-led recession. This wasn’t the aftermath of a caution-to-the wind buying panic or Internet foolishness. This was the real deal, and the bloodshed once again played out daily on our screens. For the month, both the S&P 500 and the NASDAQ Composite lost about 17%. How should we have reacted?
March 2020. A Michael Crichton-type killer virus was loose in the land. In an effort to contain the virus, economies everywhere were shutting down. The full public health and financial implications were unknown, but investors weren’t waiting around for answers. The selling was intense, with the S&P 500 losing 13%. How should we have reacted?
A good question in each case. In response, we penned “S-O-Y-H” on a couple of occasions. Good wisdom to live by, then, now, and well into the future. What do we mean by “S-O-Y-H”? Allow us to reprint the original “S-O-Y-H” story.
“Long before 2000, 2008, and 2020, times of considerable stock market stress, there was 1974. One of us actually was managing money in that long-ago time of Watergate, inflation, and high interest rates. With the S&P 500 Index down about 25%, the year was a particularly bad one, and left a lasting impression on someone new to the business. In addition to Watergate, inflation, and high interest rates, a key culprit in 1974 was oil prices at levels never seen before.
U.S. equities took a pounding in 1974. Day-after-day, investors throughout the land assumed the worst, and all but Warren Buffett, who did some of his best buying in 1974, kept selling. Our newly minted investment adviser? He went to one of the older hands at his firm, someone who had seen a lot and learned a lot.
‘I feel as though I should be doing something. What should I be doing?,’ said our boy.
The response: ‘S-O-Y-H, and by that I mean, sit on your hands. This too shall pass.’
And, pass it did. Despite yet another 70s bout of high inflation, high interest rates, and even-higher oil prices in 1979, the S&P 500 Index returned about 15% per year between the end of 1974 and the end of the decade.
But getting back to the brief exchange between the newly-minted investment adviser and his learned friend, the wisdom of the latter’s advice always stuck with our boy, and resonates even today. An earlier Perspective, ‘Knee-Jerk Reactions Almost Always End Up Being Mistakes,’ is another way of saying the same thing. The message of ‘S-O-Y-H’ and the message of that earlier Perspective are that we have a compass in the form of a well-researched set of investment disciplines, to keep us headed in the right direction during times of stress.”
So, “S-O-Y-H” when the Sirens are singing and the temptation to do something (anything) during turbulent times is strong. How did that work out in 2000, 2008, and 2020? Following November 2000, NASDAQ Technology spent many years in the stock market wilderness and actually did not surpass its 2000 high until 2013! The Value stocks that we prefer, however, ended up having a pretty decent 2000-2009 decade. In 2008, the comeback was slow; but our all-equity, Value portfolios had come all the way back by early-2010, and the balanced portfolios even before that. March 2020? Thanks to Operation Warp Speed, the vaccines worked their magic, the economies re-opened, and the markets recovered quickly and decisively.
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Never a guarantee, of course, but playing the odds, here and elsewhere, always makes sense. The odds say, stick with the disciplines and stay the course with a circumstance-appropriate investment strategy and overall portfolio structure. Volatility, uncertainty, selloffs, even punishing bear markets are facts of life, and undoubtedly are out there someplace in the weeks/months/years ahead. When these “facts of life” occur, instead of doing “something,” investors everywhere would do well to abide by the sage advice of our learned friend so many years ago: “S-O-Y-H. This too shall pass.”