Winter 2020 Thoughts: The Parting Glass
By Christopher R. English, President of Lumen Capital Management, LLC
So fill to me the parting glass
And drink a health whate’er befall,
And gently rise and softly call
Good night and joy be to you all.
— “The Parting Glass” by The High Kings
“The Parting Glass” is a traditional Scottish song sung at the end of a gathering of friends. It was purportedly the most popular parting song in Scotland before Robert Burns wrote “Auld Lang Syne.” According to tradition, the “parting glass” or “stirrup cup” was the final hospitality offered to a departing guest. Once they were mounted, they were presented with one final drink to fortify themselves for their travels. There is no record of how many riders ended up the worse for wear from having that extra drink before mounting a horse and riding off into the dark. Given that we’ve turned the page toward a new decade, it is perhaps appropriate to tip a cup in remembrance to the “Auld decade” and, as the song states, “drink a health whate’er befall.” (1)
Rewind 10 Years
The press seems to have finally settled on the term “Great Recession” to describe what we went through between 2007 and the early years of the 2010s. No decade in post-World War II America began with the anxiety that ushered in 2010. Anybody who’d owned investments in the S&P 500 on December 31, 1999, and held them throughout the decade was still down 23%, not including dividends. If you looked back upon the carnage inflicted on investors and the economy, it would have been impossible to believe that stock returns going forward would be astounding. But that is always the case when markets bottom. It would have been impossible to predict that the stock lows were being made during the bleakest days of World War II. Same with investing in stocks the day Richard Nixon resigned from the presidency or the day Ronald Reagan was shot. Markets need extreme pessimism to reach true bottoms. They need investors to wash their hands of the whole mess, sell at whatever price they can get, and walk away. They need suffocating pessimism and an outlook so bleak that commentators question the very foundations of our society. That’s what you had in 2010.
Unemployment was nearly 10%, compared to the under 4% we have today. We were in the midst of a full-blown housing debacle. There was a soaring deficit and rising inequality between those working in a few industries and most of the rest of the country, not to mention a very young Obama Administration trying to grapple with all of these issues. Things could have looked worse, but not by much. On top of that, investors had all of the previous decade’s bad news and wars to digest.
Markets fight an eternal battle between buyers and sellers. Markets don’t know months, years, or investment cycles. They care not a whit for your retirement plan or your life goals. They march to the beat of liquidity. When there are more buyers than sellers, stocks go higher. The inverse, when there are more sellers than buyers, results in stocks decreasing. The average investor can only take so much bad news, and when that news gets bad enough, all the sellers come out at the same time. Selling can beget more selling. That kind of gloom is where bottoms are formed. So it was in February and the first week of March 2009 as investors vomited out their portfolios. Stocks lost 16% during that time. Then, with the news about as bad as I’ve ever seen it, with a majority of burned-out investors walking away from the markets, stocks rallied (and rallied hard) through the end of that year.
What The Last Decade Brought
As a new decade began, very few prognosticators predicted anything like the market returns the rest of the 2010s notched. Who could really blame them given what investors had stomached the past few years up to that point? Even though stocks had positive returns in 2009, many in the investment class and the media thought we might give up all of those gains as 2010 rolled along. Instead, on a total return basis through the rest of the decade, the S&P 500 returned the following: 12.78% in 2010, flat in 2011, 13.41% in 2012, 29.60% in 2013, 11.39% in 2014, -.73% in 2015, 9.54% in 2016, 19.42% in 2017, -6.24% in 2018, and 28.88% in 2019. (2) There were two down years in the decade, averaging about a 3.5% decline in both. The years when the markets advanced did so at an average rate of 17.86%. Throw in 2011’s flat year and markets still advanced at better than a 15% clip.
There is an old saying that generals always fight the last war. That can be applied to many in the investment class as well. Burned so badly in the last bear market, the TV and media crowd fought this market all the way up. Every bad event was a reason to sell, every negative headline a reason for why we were returning to the bad old days of the last decade.
What did the so-called “smart money” miss? They missed that the Obama Administration, along with the Federal Reserve, was determined to throw as much money at the crisis as necessary in order to make sure the credit engines didn’t lock up more than they already had. Early on, they also missed all the key technological advancements that were going to make a difference down the road, and finally, they missed that each year the economy was incrementally getting better. Things are still getting better.
Just Volatility, Or Something More?
Investors often confuse the natural volatility of stocks with serious economic problems. Sometimes there are legitimate problems, but what you see most often is the natural ebb and flow of stock prices, that eternal battle between sellers and buyers, greed and fear. In a normal year, the principal reasons that stocks stall out and decline is when they reach a period of over-valuation and the market’s corrective measures take hold. There is a higher probability that we could be approaching one of those short-run periods in the next few months, where stocks hit the pause button. While a valuation analysis is suggestive for the potential of higher prices this year, the S&P 500 is up nearly 12% as of this writing since Labor Day. For 2020 so far, we are up 3%. Markets haven’t seen a substantive down week now since Labor Day. As wonderful as this is, logic dictates that it won’t go on forever. It’s hard to judge if we pulled some of this year’s advance into the last three weeks of 2019. It is entirely possible that markets may post returns that are normal by historical standards but seem subpar when viewed through the lens of the last decade. There is a higher probability that we could see most of our gains in the first six months of the year as election uncertainty enters the picture next fall, and that markets could become more volatile if the Democrats look likely to nominate a progressive candidate to run against President Trump.
In Light Of This…
I believe now is a great time for us to review your portfolio, especially if there are any changes in your life that need to be addressed as we look to the coming years. Long-run stocks have produced above-average returns for many decades, but the ticket you punch when you buy into the markets is volatility. On average, stocks have a volatility reading of about 14%. That means at least once a year, stocks will likely decline on average 5-20%. That’s something to think about after such a significant advance last year. If you have a million-dollar portfolio and it’s all in equities or their related instruments, then you should prepare for potentially anywhere from a $50,000 to a $200,000 decline in your investments at some time during the next downdraft. If that gives you pause at this point, then we need to talk. Just know that when we’re down that 5-20%, all of the investment media will tell you the world’s going to end from an investment perspective. We came close to that in 2008 and it’s possible that one day in the future the investment world will end. But it only gets to do that once and there’s still a higher probability that the next correction we see will be more of the same, and likely a better period to buy equities.
My December letter dealt with the present. This one reviewed the past, and in February, we’ll talk about the future. To me, that’s where the excitement lies! Speaking of things that have been, it’s hard to believe it, but 2020 marks my 34th year in my business and 19th of running Lumen Capital Management. I never think about what I’ve chosen to do for a living without thinking about my father. Richard Joseph English was a small-town attorney who went to work in his office in Union City, Indiana, in 1960 and spent his entire career in that place. Dad did okay, but nobody ever mistook him for Warren Buffett. He was interested in making money, but it wasn’t the only thing that drove him. He liked the personal aspect of being, as he put it, “a big fish in a small town.” Most of what I learned about people, I got from my dad. I was an involuntary worker for him starting around the age of 13 when I used to clean his office and run errands. I held those jobs, along with other clerical duties, at his office until I finished high school. My father loved to practice law and he loved people. He worked Saturday-morning hours so that farmers could come into town and discuss business. Some of those men and their wives came in just to talk, since back then it could be lonely on a farm. Dad never minded. More than one elderly lady told me at his wake how much he’d meant to them after their husbands had died. Dad also spent a lot of time meeting clients in their homes. I think of him often when I’m sitting around somebody’s kitchen table. I modeled my firm on what I’d learned from him all those years ago. Others taught me how to invest and manage money, but Richard English taught me how to work with people. For that, I am forever grateful.
Good night and joy be to you all.
Thank you for your support all these years! If you want to chat about your portfolio, life, or whatever is on your mind, call my office at 312.953.8825 or email us at lumencapital@hotmail.com.
About Chris
Christopher R. English is the President and founder of Lumen Capital Management, LLC-a Registered Investment Advisor regulated by the State of Illinois. A copy of our ADV Part II is available upon request. We manage portfolios for investors, developing customized portfolios that reflect a client’s unique risk/reward parameters. We also manage a private partnership currently closed to outside investors. Mr. English has over three decades of experience working with individuals, families, businesses, and foundations. Based in the greater Chicago area, he serves clients throughout Illinois, as well as Florida, Massachusetts, California, Indiana, and other states. To schedule a complimentary portfolio review, contact Chris today by calling 312.953.8825 or emailing him at lumencapital@hotmail.com.
*Long ETF’s related to the S&P 500 in both client and personal accounts.
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posted by CR English at 6:35 PM
