Wind At Our Backs

I have been fairly successful in the stock market over the years.

Most of that success was due to buying well diversified mutual funds and holding for the long-term.

History shows that being invested in equities has been the surest way to build wealth in the United States over the years aside from owning your own business.

It has allowed average Americans to participate as part owners in advances in the economy and has also proven to be the best protection against inflation over the long run.

You could not have much more of a graphic example of that than in this chart that tracks returns of various asset classes over the last 100 years.

Source: https://eldarinvest.com/en/historical-stock-returns/

.However, you may notice that this graph is misleading in that it is not drawn to scale.

To give you better perspective, consider this graph that compares REAL returns (after inflation) for the major asset classes.

Source: https://www.investorsfriend.com/asset-performance/

 

Many believe that their house is their best investment and inflation hedge.. However, 100 years of data indicate that stocks have returned about 2% in extra absolute returns than residential real estate has.

Source: https://eldarinvest.com/en/historical-stock-returns/

The stock calculation above also ignores dividend income on the stocks as the house values ignore possible rental income from the asset. Including dividends would increase the advantage to over five percentage points.

Notice that this graph is also not to scale,

Source: https://eldarinvest.com/en/historical-stock-returns/

 

That extra 2% per year compounded over 100 years adds up.

$1,000 invested in stocks 100 years ago would be worth $398, 276.

$1,000 invested in real estate 100 years ago would only be worth $50,505.

If you include an extra 3% in dividends on stocks for those 100 years you would have $6.5 million.

Real estate has performed better compared to stocks over the last 25 years as housing values increased substantially as mortgage rates dropped over the period.

However, stocks still win.

A few factoids that drive that point home. 

$10,000 invested in the S&P 500 would be worth over $1 million today.

It is actually around $1.3 million. $340,000 in real dollars adjusted for inflation.

I am not aware of many $10,000 homes in 1980 that are now worth $1 million.

In addition, if there are any Baby Boomers out there who are not comfortable financially they did not save very much and/or did not invest in the stock market.

The wind was at their backs almost their entire adult lives.

In the last 15 years the S&P 500 has increased over 10-fold.

I know several people who got completely out of the stock market as stocks cratered during that bear market. I implored one of them at length to stay the course telling them they were making a mistake. I have often wondered whether they got back in. Unfortunately, human behavior would suggest otherwise.

The S&P 500 is up 26% in the last 4 months. That is $9 trillion in extra value in just 88 trading days.

Advances in technology stocks have been largely responsible for the large increase in stock market values since 1980, the last 15 years and the last four months.

In particular, names such as Apple, Alphabet (Google), Amazon, Facebook (Meta), Microsoft, Tesla and Nvidia.

These seven names are now referred to as the "Magnificent Seven" due to their size and influence on the stock market.

You see that in this chart where these seven stocks alone now have a large market cap than any other country's entire stock market.

The value of the U.S. stock market (59.6% of the total) is larger than the entire rest of the world combined.

Credit: https://www.visualcapitalist.com

In 1989, the U.S. stock market was only 28.9% of the global stock market despite its share of global GDP actually being slightly higher then than it is now.

Why do so many people around the world dislike the United States while at the same time want to come here?

Those charts say a lot.

This chart also does.

The U.S. stock market in 1994 (right at the beginning of internet revolution) was valued at 66% of U.S. GDP. It is now valued at 193% of GDP---nearly 3 times more.

How has all of this been possible?

One reason is that all of those big technology names that have been created and founded in the United States.

Is it just a coincidence that with all of the talent and intelligence in the world that it just so happened that it occurred in the United States?

The other reason is the incredible amount of money that has been created by the Federal Reserve over the last 15 years.

It started with what was called QE (quantitative easing) to deal with the 2009-2010 financial crisis and culminated in the money printing on steroids that resulted from the response to Covid.

Look at this chart of the M1 Money Supply.

This is the total cash in circulation including money in people's wallets, checking and savings accounts.

The money supply of dollars in circulation has increased more than 4-fold since 2020.

Source: https://www.investopedia.com/terms/m/moneysupply.asp

That money had to go somewhere.

It fueled inflation in everyday items and has also affected house and stock prices.

What should we takeaway from all of this?

1. The last 30-40 years have been one of the greatest periods for building wealth in history.

2. That is particularly true for anyone who owned the S&P or the NASDAQ indexes in the U.S. However, those in bonds and real estate have also prospered like few other times in history.

3. The wind has been at our backs but what if the winds turn?

4. Understand that the drivers behind this wealth creation involved a unique combination of  entrepreneurial, political and economic factors in the United States.

5. Those factors are currently all at risk in the current environment in the United States. 

7. Interest rates have risen after falling for almost 40 years. 

8. Stock prices relative to the nation's GDP are 3x what they were in 1994.

9. The current Presidential administration is also openly hostile to success and entrepreneurial freedom. It is more interested in picking winners and losers in the economy and in redistributing the economic pie than in making it larger.

10. Understand that what goes up can come down. The wind can change direction. Protect yourself and your country. Plan and act accordingly knowing where we are.