Welcome to the first posting of the Parsec blog. This is something new that we are trying in order to share some of our thoughts on various topics such as the economy and our investment philosophy. We are committed to posting updated content each week on Friday, and possibly more frequently depending on market conditions. A number of us are involved in writing the posts, so you will have a chance to read a variety of perspectives. We welcome your feedback, whether positive or negative.
At the risk of sounding too technical, today let’s talk about volatility. As of yesterday’s close, the S & P 500 was down 38.2% for the year. When I arrived this morning, S & P 500 futures were down another 6.5%. We have recently seen several intraday swings on the Dow of 800-1100 points. This type of volatility is distressing to both us and our clients, but one of our core principles is not to let random short-term market movements distract us from our long-term goals. We are currently suffering the second worst year in stock market history, and are flirting with taking the crown for the worst year ever (currently held by 1931, -43.3%). This is not the type of environment in which to be a seller of stocks.
A recession has not been officially declared yet, but if we assume that we are currently in one, there are many companies that we cover that still have rising earnings and dividends. Over time, stock prices follow rising earnings and dividends. In the current negative market environment, focusing on quality companies with low levels of debt, and rising earnings and dividends, is even more critical than under less volatile market conditions.
Over the long-term, the market has had average annual returns of about 10% since 1926. The current decade has had negative returns, and is the worst in modern history including the 1930’s. We continue to believe that these negative returns cannot persist. Two of the best years in stock market history were 1933 and 1935, which nobody at the time would have predicted.
We have heard a number of arguments that “it’s different this time.” This argument was used to justify unsustainable valuations of technology companies earlier in the decade, and is now being used to support the thesis that the market will continue to decline. Throughout history, there have been many panics and bubbles that were unthinkable and unprecedented at that particular point in time. Now nobody even remembers when they occurred or what caused them. It’s like trying to remember who won the Super Bowl two years ago. I don’t even know who played. We have data going all the way back to 1815, and the consistent theme is that there have been many more up years than down years. We have endured the panic. Let’s stay in position for the eventual recovery.
Bill Hansen, CFA