Now is No Time for Doomers
With the 2024 election drawing closer, many people are dialing in to their fears and hopes. For investors, now is a good time to step back and reconsider: should we be fearful? Hopeful? How about a measure of both.
In a 1936 essay, F. Scott Fitzgerald famously wrote: “The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function. One should, for example, be able to see that things are hopeless yet be determined to make them otherwise.” If you’ve heard this quote, you’re probably mostly familiar with the first sentence. Of course, he intended both sentences to be considered together. The quote speaks of optimism during times of despair. I imagine despair was a prevailing sentiment during the 1930s; and a call to hopefulness from such a prominent figure of the time must have been inspiring.
Today, I am often confronted by those who seem to be in a similar struggle. While despair may be too strong a word, there does seem to be a prevalent if vague sense of foreboding and dread. This has been surveyed and documented broadly. I’ve seen it firsthand. Some attribute its origin to the Great Financial Crisis of 2008-2009, others to the more recent pandemic, others to the tone of political discourse, or to the influence of social media. It’s probably a measure of all these and more.
While I think I understand why this gloominess persists, I wonder whether Fitzgerald’s call to active hopefulness persists as well. Therapists, sociologists, and the like could provide much insight into the national mood in the fall of 2024. From my narrow lens as an investor and financial planner, I see gloominess (I prefer the term “doomerism”) as incompatible with the factual and measurable state of the US economy. People seem to feel worse about things than they actually are.
Fear Another Roaring Twenties?
Fitzgerald wrote from the Roaring Twenties (e.g., The Great Gatsby) through the Great Depression (Tender is the Night), a time of first hedonistic euphoria and then catastrophic economic suffering, arguably the worst such time in US history. Doomers today see the seeds of another catastrophe all around them. I disagree. Yes, our society faces multiple challenges great and small. But the 1920s are not a compatible timeframe for comparison with today. And conditions today are not the same as those preceding the Great Depression, not even close. We are in a time of great relative wealth. After enduring the Great Financial Crisis of 2008-2009, the US economic system has I think displayed substantial durability. And yet many still awake each morning with a sense that the system doesn’t work and is doomed to fail. What is this about? And is this doomerism harmful?
Why the Doomerism
Like most everything, our degree of faith in “the system” could be measured across a spectrum from cynicism at one end (the Doomer’s notion that it’s all a house of cards) to euphoria at the other (the fool wearing rose colored glasses). A thoughtful and curious person would not likely be able to hold for long at either end of this spectrum. While we’re so quick to dismiss excessive optimism as naïve or foolhardy, why do so many find a home among the most fearful and pessimistic? Industries have arisen to support the fears and grievances of the Doomers. There are several reasons why:
It’s human nature. It is likely that we humans are hardwired for catastrophe thinking. Fear of calamity could be an inherited trait that enabled survival. It’s the mentality of prey. But fear like this is useful only when it is proportionate with reality.
Wealth not prosperity. The US produces great wealth that is not evenly distributed. For some, our current system offers phenomenal opportunity. Others find it hard to make headway. There is a bias to thinking one’s own experience can be generalized to what is happening on a macro level. Too much grievance about one’s own predicament could lead to instability.
There’s always bad news. Bad news is much more alluring than happy stories, so there is a skew towards negativity in the media. Immersion in media messaging can change viewpoints. We end up believing what we are fed, even if we know in our hearts that the news is skewed by the outlet that produced it. But cherry picking of bad news stories over others doesn’t necessarily lead to negative outcomes: the recession has not yet occurred, in spite of the drumbeat of predictions several months ago.
It’s an election year. Candidates know that fearful and angry voters are much easier to motivate than those that are comfortable and happy. It’s no wonder that each side is calling this election cycle an existential event. It would be a great time for all of us to do a “media fast” like with food during Lent, Yom Kippur, or Ramadan. We could all just watch romcoms and cooking shows and ignore the hype. Vote, but ignore the vitriol… Such wishful thinking.
But Are the Doomers Correct?
Perhaps. I may of course be totally wrong in my perceptions, but I think the answer is an emphatic no. The US economic system is demonstrably robust and durable. Look at all that was thrown at it over the past five to twenty years (or the past 100 if you really want to consider it). The numbers are strong:
Corporate earnings. According to Factset: “For Q3 2024, the estimated (year-over-year) earnings growth rate for the S&P 500 is 4.6%. If 4.6% is the actual growth rate for the quarter, it will mark the 5th straight quarter of year-over-year earnings growth…”[1]
Employment. Fed policies to slow inflation have also begun to slow the economy. Even still the national unemployment rate as of this writing is at 4.5%[2] which is what economists call “full employment.” Economists have to dig into the different employment metrics to find substantial bad news.
Inflation. The September reading for inflation clocked in at 2.4%[3]. This means the rate at which price levels are rising has reduced substantially from post-pandemic highs. But this doesn’t mean that price levels have gone down (that would require negative inflation). People still feel the impact of higher prices, but the markets like the reduced rate. Some inflation is necessary, even good, with a growing thriving economy.
Interest rates. Beginning to come back down. The move by the Fed from near zero to over five percent caused many economists to predict a recession, which never materialized. There are many reasons for this, such as an economy that was still amped up by pandemic stimulus and a reduced efficacy of interest rate policy. After we persevered a rising rate environment so well, we hope to move into a falling rate environment. This is often very good for investors.
Economic growth. Slowing but still strong. At 3.0%[4] the US economy remains strong. It can help to remember how massive is the US economy. Like an aircraft carrier, momentum takes a long time to dissipate. This is not something that sees dramatic short-term volatility.
Is Doomerism Harmful?
For investors, yes it can be. If fearfulness causes you to invest too conservatively, you could miss out on growth and have your purchasing power erode over time. I’ve read that investor sentiment for some has never recovered since the Great Financial Crisis of 2008-2009. If you learned from that crisis to mistrust and therefore reject the system and you keep all of your money in a literal or figurative mattress, well, you’ve missed out. But if your summoned faith in the potential for growth, and invested accordingly, you’ve been rewarded. For example, if you invested $1000 in the S&P 500 at the beginning of 2009, you would have about $8,528.95 at the end of 2024, assuming you reinvested all dividends. This is a return on investment of 752.89%, or 14.92% per year. [5]
Going back to the Fitzgerald quote, remember that the quote came in the depths of the Great Depression. What if you had invested back then, during the worst of times in the US economy? If you invested $1000 in the S&P 500 at the beginning of 1936, you would have about $8,529,278.97 in 2024, assuming you reinvested all dividends. This is a return on investment of 852,827.90%, or 10.78% per year.[6]
Conclusion
Nothing grand in terms of strategy right now. It’s time to keep it simple. Try to understand and control your biases. Try to manage your emotions, such as fear or excessive optimism, such that they don’t cause you to make rash decisions. Be patient. Diversify your assets across strong investments (stocks, bonds, real estate, alternatives, etc.) and let it all play out. And hang in there.
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This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
[1] From Factset, Earnings Insight, September 20, 2024
[2] Sunday, October 13, 2024 article in the Providence Journal, from USA Today
[3] Bureau of Labor Statistics, October 2024. All items including food and energy. Seasonally adjusted.
[4] US Bureau of Economic Analysis, September 26, 2024 release.
[5] Website Officialdata.com by author Ian Webster, using information derived from Robert Shiller’s book Irrational Exuberance.
[6] Website Officialdata.com by author Ian Webster, using information derived from Robert Shiller’s book Irrational Exuberance.