Something was very different this Spring. A once-in-a-century type of event.
Did you notice it? Many centuries ago, the Mayans could have told us.
The vernal equinox came early – March 19th. The earliest in more than a century. Don’t blame carbon emitters or the COVID-19 virus. The earth’s natural rotation means that an equal amount of night and day hit all US time zones earlier in the year than at any time since 1896.
I understand: the early vernal equinox was not on the top of your mind. But I’m trying to zoom out our short-term focus to ponder a bit on the big picture here. The one-hundred-year view.
During this first week of Spring, can we talk a little bit about stock market gyrations? And then meditate on interest rates as well?
In the spirit of meditation, the Judeo-Christian tradition provides a metaphor for stock performance. By contrast, the path of interest rates and bonds, metaphorically, follows the Hindu-Buddhist tradition. I’ll explain what I mean by those metaphors later on, as I understand I’m saying something that sounds a little kooky.
What’s happening in the stock market these past two months is not new. It’s a hundred-year flood that periodically recurs, well, about every ten years. Let’s try to see the larger pattern.
What’s happening in interest rates, by contrast, is totally wild. Uncharted territory. There is no past precedent for these moves.
In an interview with the BBC in 2009, Charlie Munger – the Vice Chairman of Berkshire Hathaway and famously Robin to Warren Buffett’s Batman – laid out a concise version of the correct hundred-year view of stocks.
“I think it’s in the nature of long-term shareholding, of the normal vicissitudes of world outcomes, of markets, that the long-term holder has his quoted value of his stocks go down by say 50%,”
said Munger during the interview.
Even beyond the utter normalcy of this kind of volatility, Munger says the periodic 50% drops determine who will be rewarded.
As Munger continued, “In fact you can argue that if you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.” Munger has 96 years and $1.7 billion to back up his wisdom right there.
So, stock market fluctuations like this past week are normal. Carry on as you were. Do nothing different. If you can, maintain regular automatic contributions to your portfolio.
Incidentally, this recent volatility is a reminder of why owning individual stocks could generate bad investor behavior (trading frequently) whereas owning broad indexes of stocks could generate good investor behavior (doing nothing in the face of volatility). Heading into a recession, we can easily see why any particular business will get crushed. We can’t help but have an emotional reaction to a particular story of a particular company. But a broad index of stocks, heading into a recession, maybe inspires us to remember that over the next few decades a few thousand of the best-run and most innovative companies in the world will figure out ways to generate profits, and therefore a return on investment. Indexes help us worry less about any particular story and to focus on the longest time horizon possible.
The stock market, understand as a whole, follows a linear path through the medium term. It sure doesn’t seem that way, especially this past month. We humans with our hominid brains want to take note of a every single up and down movement, like baboons tracking a particularly delicious, but peripatetic, insect on a tree branch. Up, down, up, up, up, down.
The up and down is an illusion, however, as the stock market, again as a whole, goes upward with each decade. In the long run, over a century, the stock market understood as a whole, follows first a linear, and then an exponential upward, path. In the longest run, a basket of stocks is unidirectional. Birth, life, and then an ascent into the infinite. That’s what I mean by the metaphor of the Judeo-Christian tradition.
Meanwhile, interest rates typically act more like the Hindu-Buddhist tradition of a circular path. Sure, rates change a little bit over time, but they always tend to loop back upon themselves. Unlike stocks, interest rates resemble a wheel. A cycle of birth, death, rebirth and reincarnation. We don’t ascend or decline too much over a century. We don’t depart from the wheel. Except this month, we did.
Holy Cow! 1
Anyway, rates recently have been anything but normal. We’ve never in US history seen interest rates this low.
As Covid-19 panic set in mid-March, thirty-year US government bonds hit 1% mid-day, while 10-year government bonds hit 0.5%, albeit briefly. We’ve seen 0% overnight Fed Funds rates before, but even in the 2008 Great Recession, long-term US bonds didn’t hit these low rates. This all indicates panic in the financial system. For what it’s worth, the Fed’s move to carpet bomb financial institutions with liquidity following unprecedented interest-rate lows seems appropriate to me. We do not want the wheel to break.
Finally, the vernal equinox again. Few of us alive today will live to see another March 21 vernal equinox, which will not happen until the year 2101. What else will be never-before-seen between now and then?
A link for those who don’t follow the Old Farmer’s Almanac assiduously.
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- Thanks very much, folks, I’ll be here all week with even more Hindu-tradition jokes. ↩