Five S&P 500 Facts To Boost Your Investing EQ

 

Todd Gordon December 8th, 2021

I’ve been watching this stock market trade since I left college in 2001, and then took my first job as a trader immediately after college in 2001. Being at it for 2 decades straight, I just recently launched my very first wealth management business in October and I can confirm it’s been an incredibly rewarding, and challenging, profession. Absolutely zero doubts that it was the right move, but the most challenging part comes from my interaction with professionals in different industries, often times older, and more often smarter than I. They have been watching me on the TV or the internet trading or flapping my gums about the markets. I’ve had many conversations with these high-IQ professionals who are very accomplished in their careers but have unfortunately missed out on the massive rally in the stock market with a large part of their assets nervously waiting for the ‘coming crash’ to buy at lower levels – that never seems to come. Why is that? It’s not a lack of IQ, but perhaps the EQ that needs some focus. That means setting emotion and your burden of constantly being ‘right’ aside. Let me explain.
I think the culprit and the cure is the reality (my reality anyway) that we are in the 2nd phase of the technological revolution. The first phase of the tech boom was the late 90’s as the internet was first coming online. It was filled with crazy fads, IPOs, and paper-thin companies with no real earnings trading at insane valuations, but it was the start of something that would change the world forever. Fast forward 8 years into a housing boom and bust that almost crashed the global economy that would spark the 2nd technological boom. The Fed pulled the economy back from the brink of a housing disaster by suppressing interest rates to encourage more borrowing and spending, and investors to abandon fixed income investments and move into stocks to earn any real return.

It was these low interest rates that encouraged spending and investment in the new age of technology that sparked the 2nd phase of the bull market.  The companies leading today’s bull markets are real, they are changing the world, and they are making an insane amount of money.  It’s true that the Fed and government injected trillions into the economy to combat the pandemic, not unlike the response to the credit crisis, but it does not change the fact that we were in a roaring tech bull market before we first heard of COVID in January 2020. The accommodative monetary and fiscal policies are only accelerating the rally.

 True that we have an inflation problem, but I do believe it’s the result of a man-made recession in response to the pandemic that shut down supply chains driving up prices.  Supply chains will come back online to meet the insatiable demand as we push forward in the next wave of the technological revolution.  We are after all a capitalist economy where the supply curve is temporarily a few rungs low compared to the demand curve.  To prove my point, semiconductors are the most in demand, but we simply don’t have the productive or labor force capacity to meet that demand.  As prices are going up competitors will step in to meet that demand and ease the inflationary pressure allowing these new technologies that require semiconductors to come to market.

Getting back to the point of why so many people have a distrust of this rally and have been under allocated in their portfolio is a function of the nature of this rally. It’s really techy and hard to understand and second it’s happening very quickly! Phase 1 of the tech boom was connecting everyone around the globe to the internet, which I think in hindsight was easy enough to understand. But this time around? Good luck trying to educate the masses on the future technology currently in development that will become our reality. They’re doing things that most can’t begin to comprehend that will significantly change the way we live. It’s my job and I barely understand it.
The 2nd reason people are underinvested is a function of the digital information / tech age; the speed of information. It’s quite literally traveling at the speed of light and it’s constantly assaulting the investor from all angles from individuals and corporations grasping for your attention.
I grow very tired of the countless stories, tweets, internet posts, headlines, etc screaming of a coming crash that could wipe out everything. Some of the cautionary tales are quite compelling stacked with stats to back up the case of why a crash is imminent, and a handful of them may even be correct.
But you know who does understand? The market understands – by way of higher prices. Investing with EQ – emotional intelligence – is being smart enough to know you can’t know everything, having confidence to control your emotions and MOST importantly, taking the negative headlines in stride. As I said I’m not a trader with the highest IQ, but my EQ allows me to control my emotions by taking the sensationalist headlines and tweets with a grain of margarita salt (I’m listening to a live Jimmy Buffet show in Jacksonville FL as I write this) and staying on the long side of the market rewarding me with profits I never thought imaginable.
If I have not made my case yet that an improved EQ will allow you to sidestep the account-draining cautionary tales of why the bull market is dead from those applying yesterday’s valuation metrics to tomorrow’s technology, have a look at the following. I think the single most important point of this article (that I sat down to explain in a short few paragraphs that spun into this) is the following 71-year chart of the S&P 500.The S&P 500 is arguably the most widely followed stock market index in the world. It’s the 500 largest market capitalization companies in the US and it began in 1950. If you’re afraid to be invested because you ‘might lose everything’ these five facts should help you develop your investing EQ and allow you to sidestep the noise and participate in this massive 2nd gen tech bull run. In the 71-year history of the S&P 500:
  • The S&P has never been negative 4-years in a row
  • There have been 3 significant declines never more than 58%
    – 1973-1974 -49.92%
    – 2000-2002 -50.50%
    – 2007-2009 -57.69%
  • Each significant decline was recouped in 6 years or less
  • The S&P is up 27,953% life to date NOT including dividends
  • The last major bull run from 1970’s was 2409%. Currently we’re up ‘just’ 603%

In closing, I think it’s a safe assumption to say that I’m bullish on this market. But there is a key distinction to make and that is I’m not a perma-bull living with rose colored glasses. I know bear markets exist, I’ve successfully traded through the last two bear markets, and am fully aware they can be vicious when you’re caught in the bear’s cave. It’s fully within our company’s operating agreements that we can go to 100% cash if needed and actually have the ability to put on short exposure in the case of an extended bear market. But my EQ says that any fear of an extended bear market lasting more than 4 years greater than 60% may be unfounded, considering it’s never happened in 71 years. You would have to go back to the 1920’s to justify those fears.

I’m smart enough to know that I’m not smart enough to pick the top of a 100+ year rally and that I will remain long, not expecting to make history any time soon.

Inside Edge Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

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Todd.