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Should Struggling Economies Affect Your Investment Strategy?

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As the U.S. economy continues to recover from the 2007–2009 recession, much of the rest of the world is falling back into a recession (or is teetering on the brink).

Does this mean that global diversification is a bad investment strategy right now?


27-0689MA Treacherous Economic Landscape

To help answer this question, let’s explore an oft-documented period of our own history:

The U.S. economy was deteriorating. Unemployment climbed to 24.1%, and many ordinary Americans had no choice but to live in the streets. Dissatisfaction with the White House was high during these difficult times—and toward the end of the year, voters exercised the power of democracy to express this dissatisfaction: they elected a new president by 472 electoral votes to 59 (the greatest landslide victory of its time).

In addition:

  • Tens of thousands loaded up their belongings to live in cars, traveling from place to place looking for work.
  • Shanty towns began to appear around the country, built by homeless people using whatever materials were available to them.
  • 43,000 marchers set up campgrounds in Washington, D.C. demanding early payments of cash bonuses to help them survive.
  • The newly instituted Revenue Act raised U.S. taxes across the board, with top income tax rates rising from 25% to 63%.
  • For those lucky enough to be employed, companies implemented wage cuts of up to 30%.
  • In hopes of creating more jobs for the unemployed, the government cut working hours.
  • Due to widespread malnutrition and poor health, tuberculosis swept the nation[1]

Historical Perspective

This was the economic backdrop in 1932, two years after the start of the Great Depression. Does this sound like a good time to be investing? Definitely not.

But believe it or not, 1932 presented the best 5-year period, from 1926 to today, for U.S. stocks. Between June of 1932 to May of 1937, the U.S. stock market returned 367%—nearly quintupling your money over five years.

And the best three-year period for stocks? That would be the following year, 1933. A period that looked something like this:

1933 was the worst year of the depression, with unemployment peaking at 25.2% (1 in 4 people unemployed) in 1933. Adolf Hitler became the chancellor of Germany and opened the first concentration camp at Dachau. Tens of thousands travelled the road and rail in America looking for work, and the US banking system which was under great strain was propped up by the US government (US banking act of 1933) to try and stop the panic of people withdrawing their money from the banks. The continuing drought in the Midwest made even more of the land into dust bowls.[2]

A gloomy outlook indeed… however, starting in March of 1933 the market was up 195%—nearly tripling each dollar over three years.

What This Means for Us Today

The examples from 1932 and 1933 should illustrate that the economy and the stock market are not necessarily linked. Take a look at research by Vanguard’s Chief Economist Joe Davis, which found:

“Consensus analyst estimates of future GDP growth had almost no correlation to real stock returns over the subsequent 10 years. For fun, Mr. Davis also measured the correlation between nationwide rainfall and future stock-market returns. Amazingly, it ranked right down there with GDP growth and earnings estimates at predicting where stocks might go over the next year and 10 years.”

In other words, just because a particular country or region’s economy is struggling right now, it doesn’t mean that this will end up being a bad time to be invested there—even if it may feel difficult in the short-term.

To reuse a quote from our last post from Rob Arnott, “In investing, what is comfortable is rarely profitable.” Or as Michael Batnick, the Director of Research at Ritholtz Wealth Management, recently wrote, “The bottom line is that investors can build great wealth in the market, but the price of admission can be gut wrenching. Avoid risk and you are all but doomed to inferior returns, there really can be no other way.”

So if find yourself shying away from struggling economies, remember U.S. stock performance in 1932 and 1933… and don’t be afraid to go globetrotting.

[1] http://www.thepeoplehistory.com/1932.html

[2] http://www.thepeoplehistory.com/1933.html


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Cordant, Inc. is not affiliated or associated with, or endorsed by, Intel.

Published on December 16, 2014

Isaac Presley, CFA

Isaac Presley, CFA

Isaac Presley is Director of Investments for Cordant, a wealth management firm serving current and former Intel employees. To learn more, you can read Isaac's full bio.

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