What an eventful day this past Sunday. The Super Bowl and Groundhog Day, all-in-one. The weather was mild, the Super Bowl was entertaining with several good commercials (how about an elderly Bill Murray stealing the groundhog again thirty years later?). Plus, the chubby rodent from Punxsutawny forecasted a short winter.
On top of these festivities, Sunday was a rare, historic date as well, especially for us number geeks: a “universal” palindrome. A palindrome is a nerdy word meaning a sequence of letters, numbers, words or phrases that read exactly the same, backward or forward.
Some clever palindrome word phrases include: “never odd or even”, “was it a rat I saw” and “a man, a plan, a canal, Panama”.
Sunday’s calendar date of 02202020, posting the first eight-digit palindrome since year 1111 – over 900 years ago! What makes the palindrome universal is that the number sequence is precisely the same whether you use the US date format (Month / Day / Year) or the international date format, which transposes month and day.
There have been many other calendar palindrome events in recent times. In 2019, there was a palindrome streak lasting longer than a week, beginning on September 10th through September 19th, but only five digits in length, which is really a minor-league palindrome.
And there was a close call for a universal palindrome back in November 2011, but the international date failed to deliver the right sequence.
The propeller heads say the next universal calendar palindrome won’t occur until December 12, 2121, more than 101 years from now, so relax, most of you won’t be around to observe it. I, however, plan to be!
It is hard to fathom that we’ve already journeyed through two full decades of the twenty-first century. It has been an eventful period, especially from an investment perspective.
Technically speaking, the US stock market accomplished a micro-palindrome over the last twenty years: January 2000 and December 2019 both set record highs for US stocks. In between those book-end dates, the intervening 238 months posed a wild ride for investors.
If you drill down, the fast start to 2000 was a spillover of the 1999 stock market party. US stocks peaked in March 2000, then gave way to a nasty long bear market lasting nearly three years. After mounting a comeback, the great market crash of 2008 destroyed US stock returns as the decade drew to a close in 2009. Case in point, per Wall Street Journal, the S&P500 stock market index returned an average (0.73%) loss per year during the decade of the “00s”. A brutal lost decade for investors.
Then, massive unprecedented federal government fiscal spending and money printing by the Fed Reserve during the 2008-2009 economic crisis stoked a sharp stock market rebound, propelling stocks violently upwards and resulting in the longest bull market run in US history.
For the decade ending December 2019, the SP500 index grew a staggering 498% on a cumulative basis, averaging 13.2% per year (per Wall Street Journal). A tale of two decades, to be sure.
So, what are the investment lessons from the past twenty years and what could it mean for the coming decade?
Although a definitive market prediction would be silly and useless, we know that over longer periods of time, stock valuations really matter. Stocks were wildly overvalued in January 2000 and this manifested itself over the next ten years in miserable investment returns over the next ten years.
In early 2009, it turns out that US stocks were grossly undervalued, which led to a historic bull market that is still running wild.
By any statistical measure, especially when compared to the size of the US economy (GDP), US stocks are at historic high levels, more so than the late 1920s and rivaling the March 2000 valuation bubble.
And, once again like in 2000, the S&P500 has a serious market concentration problem. Per a recent CNBC article, just five stocks – Google, Facebook, Amazon, Netflix and Apple – comprise a whopping 18% of the S&P500 market cap index as of January 2020.
Well, five large cap stocks also comprised 18% of the S&P500 index market cap in early 2000. A little eerie, right? The stocks were: Microsoft, Cisco, General Electric, Intel and ExxonMobil.
Per Morningstar, below are the average annual returns for these 2000 market cap leaders over the twenty years ending December 31st, 2019:
Microsoft: 7.4%
ExxonMobil: 5.6%
Intel: 4.2%
Cisco: 0.70%
General Electric: (4.4%)!
S&P500 Index: 5.97%
To sum, these are pedestrian, even meager returns for the 1999 market cap leaders considering the massive volatility they experienced since then. More significantly, none of the stocks remain in the top five market cap leaders now.
Hey indexers, ready to make a bet that the Fabulous FAANG Five will still comprise 18% of the S&P500 Index on December 31st, 2029.? We’re not, especially inside our clients’ retirement portfolios.
One final point: I thought textbooks say that you will earn 10% per year invested in US large cap stocks, on average? Note the average annual S&P500 Index return was a mere 6% over the past two decades. Given the extraordinary volatility of the stock market in the first decade, that’s an anemic risk-adjusted average return and underscores how damaging the asymmetrical loss math becomes during bear markets.
To sum, February 2000 and 2020 share some unsettling market similarities. We’re not doomsday advisors if we assert that the next ten years will be challenging for US stocks based on their “full” market valuation entering the ‘20s decade.
Our guidance to Baby Boomers looking forward to spiking the ball in the retirement end zone at some point this decade, successful investing will look materially different than the past twenty years and will require a fresh approach to asset allocation.
Until next time, be well.