It’s that time of year again – time to review a whole new year of possible threats, risks, and crises that might blow up our investments.
Every year there is a new batch of ‘End of the world’, or ‘End of life as we know it’ crises and threats that scare investors into nervously waiting and watching from the sidelines, but share markets have always seemed to power through them. These ‘existential’ crises include wars (including ‘World Wars’), political crises, recessions, depressions, inflation spikes, deflation, revolutions, devastating natural disasters, and a host of other events.
This time last year, in my January 2024 edition of this story, there was a nice new batch of threats to potentially scare off investors – including fears of persistent inflation, fears of US/global recessions caused by high interest rates and ‘cost of living pressures’, fears of collapsing US commercial property values infecting the US banking system, fears of a stagnant China depressing global growth, fears of emerging market debt crisis, and so on.
These threats and risks sure did make nice, scary headlines for the scare-mongers and doomsayers, but 2024 turned out to be great for most share markets around the world – not just for ‘US big-tech’. See:
Fear and scare-mongering make better headlines!
It used to be that ‘bad news sells newspapers’, but these days it is ‘bad news gets clicks’.
There is always a seemingly good reason NOT to invest. Just turn on the news (or internet) any day or night.
Somewhere in the world there is always a war, inflation, deflation, economic crisis, major bankruptcy, banking crisis, famine, drought, flood, civil war, cold war, military coup, revolution, bomb attack, interest rate hike, tax hike, rogue trading loss, terrorist attack, assassination, sovereign default, hyperinflation, trade war, current account crisis, commodity collapse, debt crisis, oil price spike, nuclear scare, foreign invasion, earth quake, tsunami, political scandal, election, currency collapse, virus pandemic, and the list goes on.
When one of these crises hits the news (which is every day), many people lose their nerve and say, “Maybe I’ll just wait on the sidelines for a while until things settle down”.
By the time the current ‘crisis’ does ‘settle down’ of course, there is another good reason not to invest, and so they wait on the sidelines for the next crisis to blow over, and the next, and the next.
Years pass, and they look back and inevitably wish they had ignored the media headlines and scaremongering and just stayed in the market the whole time.
Worse still, because they are now several years behind, it is easy to succumb to the temptation to ‘get it back’, or ‘catch up’ by taking on extra risk, gearing up, or falling for fraudulent get-rich-quick schemes.
‘FOMO’ and ‘FOLE’
‘FOMO’ (‘fear of missing out’) is a very common way to lose money (or under-perform a passive index fund) by chasing high returns, usually at the tops of speculative booms, when everyone else is also rushing in, pushing up prices to economic levels before the inevitable collapse.
At the other end of the scale, I have met just as many people over the years who have been left behind in their wealth-building journey because of ‘FOLE’ (‘fear of losing everything’).
A couple of years ago I met a couple who had been sitting in bank term deposits since panicking and selling out at the bottom of the GFC sell-off in early 2009. Term deposits had been paying at least some interest in the early years, but they paid virtually no interest in several recent years.
Their bank TDs are government guaranteed, so there is virtually no risk of loss, but the interest is fully taxable, and they offer no potential growth, not even for inflation. Meanwhile the Australian share market is up three-fold, the US market is up five-fold since then, and shares have tax benefits, growth prospects, and a relatively good inflation hedge.
The couple realised that their over-caution had resulted in them having a much lower standard of living for the rest of their lives. Their question to me was: ‘How can we get back to where I would have been?’ The answer of course is that they can’t.
‘The future is Uncertain!’
Probably the most common word used by media commentators to scare investors is ‘uncertain’.
Of course the future is ‘uncertain’! When scary-sounding events occur, people tend to think that that the future is now suddenly ‘more uncertain’ than normal, but that is ridiculous.
The future is always completely and utterly uncertain and unknowable. It always has been and always will be.
Sudden events like the September 2001 terrorist attacks on New York and Washington, the Covid-19 virus pandemic, the Japanese bombing of Pearl Harbour, Russia’s invasion of Ukraine, etc, came out of the blue. There will never be a day when the future is somehow magically more ‘certain’.
Share markets march on
Throughout this constant stream of ‘crises’, share markets have kept marching right along on their long, upward path, with temporary ups and downs along the way.
Today’s chart shows the broad stock market index of real (ie inflation-adjusted) total returns (ie share price growth plus dividends re-invested) in Australia (green, in AUD) and the US (red, in USD) since 1900.
For very long term charts like this, I use a logarithmic (‘log’) scale on the vertical axis, which highlights the fact that the compound growth rates delivered by the share markets have been fairly consistent for more than a century (ie. fairly straight lines sloping upward over time), with temporary ups and downs along the way.
These reasonably consistent share market returns have been driven by reasonably consistent compound growth rates in population, economic growth, and aggregate corporate profits, which underpin the long term growth in share prices and dividends.
On the chart I have listed one or more major events, perceived risks, or ‘crises’ each year that were probably enough to scare off many investors at the time. All of the big events are there - including the World Wars, depressions, crashes, etc.
Even when the whole world was caught up in catastrophic, destructive, global events like the World Wars, they turned out to be little more than temporary hiccups in the long upward march of share markets.
‘Where’s Wally?’
You can use this chart to play ‘Spot the War’, or ‘Spot the Depression’, or ‘Spot the crash’, etc.
All of the great, traumatic global events are there, but they are hard to spot on the chart without a magnifying glass because their impact on share markets was minor.
For example, Australia’s sharpest and deepest stock market crash was in October 1987, when the market index fell by 50% in just 19 trading days (and didn’t recover until the 1990-1 recession). Can you find it on the chart? It will probably take you longer to find than you might have expected.
Find these global ‘crises’
Can you find the September 2001 terrorist attacks (in which the financial heart of the US was literally blown up), or the bombing of Pearl Harbour, or the fall of the Berlin Wall, or the 1973 oil shock, or Nixon abandoning the USD/gold standard?
Those sudden events triggered deep and fundamental changes to the world order, but good luck spotting their impact on share prices!
Find these Aussie ‘crises’
In the case of Australia, can you find when the Australian government defaulted on its entire stock of domestic debt in a Greek-style default and restructure?
Or the constitutional crisis with the sacking of Prime Minister Whitlam?
Or the Japanese bombing of Australia (including bombing Sydney Harbour).
These were tremendously traumatic and disruptive events for economic and political life in Australia, but good luck finding their impacts on the share prices.
I am not intending to make light of massive human tragedies like World Wars that killed tens of millions of people, nor other catastrophic events. My point is that the engine of corporate profitability is remarkably robust through all sorts of major crises, even when whole nations, economic systems, and pollical regimes are destroyed or dramatically re-shaped.
Individual companies come and go of course, but if you own widely diversified portfolios of companies, or even own whole markets by using index funds, then even the most devastating crises and catastrophes have turned out to be little more than temporary set-backs for long term investors, at least for Australian and US share markets so far.
Is this time different?
In 2020 the big scare was the global pandemic and governments locking entire populations of citizens in their homes and closing businesses, causing the sharpest and deepest economic contractions since the Great Depression.
In 2021 it was runaway inflation, and governments running up massive wartime-like deficits and debts.
In 2022 it was Russia’s invasion of Ukraine, soaring commodities and energy prices, and aggressive interest rate hikes everywhere
In 2023 it was the fear of persistent high inflation, more aggressive rate hikes, fears of US/global recessions (ho-hum – we’ve seen dozens of them before!), and fears of emerging market debt crises caused by the rising US dollar and interest rates.
In 2024 it was the fear of continued ‘sticky’ inflation, fears of US/global recessions (still! = pessimists never give up!), and fears that ‘ai’ will soon destroy humanity (a prospect promoted by ai inventors themselves!).
None of these fears eventuated, but they made nice, scary headlines for the scare-mongers and doomsayers. Despite the fears and the negative headlines, share markets powered on regardless.
Fears for 2025?
Now, at the start of 2025, we have economists still warning of impending recessions if we don’t get more rate cuts NOW, Trump back in the White House talking about incorporating Canada, seizing Greenland and the Panama Canal, letting Russia take Ukraine, and China take Taiwan. Plus we have Trump’s promised tariff hikes, deportation of millions of illegal aliens, intervening in interest rates, the deficit/debt blowouts, and the list goes on.
So, is it NOW time to sell up and stay out of the market until things ‘settle down ‘and become ‘certain’?
You decide!
See also:
I have been bullish on shares, in particular US shares over the past year. For my current views on asset classes and asset allocations - see:
A note on data sources:
- For Australian shares:
- Since 1980 - All Ords accumulation index
- 1958-1979 - Sydney All Ordinaries
- 1936-1957 - Sydney 34 Ordinaries
- Before 1936 - Sydney Commercial & Industrial Index
- Before 1979, total return series use the Adjusted Lamberton dividends series
- Real returns are based on CPI inflation - ABS.
- For US shares:
- S&P500, S&P Composite, CRSP, Shiller.
- Real returns are based on US CPI data (St Louis FRED, ALFRED)