Is This Time Actually Different?
In the world of investing, four of the most dangerous words you can ever say are, “This time is different.” Throughout history, experts have warned “this time is different” when facing various crises that in their opinion render historical precedent, flawed at best and irrelevant at worst. Yet as time marches on, historians often look back (with perfect hindsight, of course) and say “this time” was indeed, not so different after all. In 2009, Harvard economists Carmen Reinhart and Kenneth Rogoff published a book entitled, “This Time is Different: Eight Centuries of Financial Folly.” In their work, Reinhart and Rogoff detail how humans across the globe and throughout history have navigated booms, busts, panics and euphoria with one key takeaway – “this time” is never really different.
As we have all seen, heard and experienced, the first six months of 2020 have been nothing short of historic. The first pandemic in one hundred years will likely create the deepest economic recession since the Great Depression. Once the hallmark of our strong economy, the unemployment rate has risen sharply, while record level initial jobless claims make prior recessions look like speed bumps. To help recover from this viral-induced crisis, policy makers around the world have swiftly approved record level spending and stimulus bills to carry the economy through quarantines and stay-at-home orders. Not to be outdone, central bankers have taken interest rates to zero (again) and enacted monetary stimulus that is seemingly unlimited, unending and unprecedented. For that, there is no historical playbook to follow.
The amount of history being witnessed right now does lead one to ask the age-old question: is this time different? To start, let us look to Warren Buffett, one of the most well-known, successful and well-behaved investors our country has ever known. With six decades of phenomenal track record, Buffett sold stocks during the market collapse in March, including all four major airlines. This is in stark contrast to October 2008 (the last bear market) when the S&P was in freefall and the Oracle of Omaha came in as a buyer, snatching up stocks at cheap prices while the panicked herd rushed for the exits. Based on his behavior in this bear market, Warren Buffett thought something was different.
How about Stanley Drunkenmiller, the Wall Street heavyweight with three decades of experience, whose hedge fund returned an average 30% per year to investors. Drunkenmiller stated back in April that the risk-reward relationship in stocks is the worst he’s seen. While the S&P 500 index has rallied as much as 44% off the market lows back in March of this year, his return off those same lows has been a meager 3%. In a recent interview, Drunkenmiller described the historic market rally over the last three months as a “humbling experience.” Clearly he believed there was something different this time as well.
So, what exactly is causing even the most seasoned and astute investors to be confounded?
Buffett, Drunkenmiller and others who look at market fundamentals and economic data see a pretty grim picture, which has led to a more conservative, capital-preservation oriented approach. Those who remember the 2008-09 global financial crisis and saw the S&P 500 drop 57% know that feeling very well.
What is different in this recession is that the S&P 500 index currently reflects a higher premium for earnings today than it did at the market peak when unemployment was a mere 3.4%. If that sounds bizarre, you read it correctly. Most bear markets see investors pay a lower price for declining earnings, yet so far in this recession, it has been quite the opposite. It’s not just that investors are paying a slightly higher premium for earnings either, as current price-to-earnings ratios (based on trailing earnings) are higher than 96% of all monthly readings going back to 1871.1 That means while we’re in the midst of a deep recession, stock valuations are currently near historic highs, typically only seen near bull market peaks. If you’ve heard of “buy low, sell high,” current valuations aren’t exactly the poster child of buying low.
Looking back at history, surely this time isn’t any different, right? Author Kenneth Rogoff, referenced earlier, is willing to take the position that this time may indeed be different despite writing a book to the contrary. In a recent interview, Rogoff stated the current environment doesn’t fit any prior models. The gap between the economy and market valuations seem to indicate that as well. Will Buffett and Drunkenmiller ultimately be proven right in the long-run or will this time truly be different? History will determine that, but there’s no mistaking that we are in uncharted waters.
Whether this time really is different or not, it’s important to remember that a prudent process and a goals-based investing approach continue to serve investors well. At Unified Trust, we’re evaluating the current data (with some near-term skepticism) while at the same time positioning portfolios to leverage long-term trends. Investment success is rarely found in trying to outmaneuver Buffett or predicting short-term market behavior. Stay focused on your goals and let the historians debate the rest.
1 Hulbert, Mark. “Opinion: The Fed Model is almost always bullish, which makes it a perfect face for this too-good-to-be-true stock market.” MarketWatch. June 23, 2020
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