For long-term investors? It doesn’t really matter…
Q1 2021 hedge fund letters, conferences and more
“Davidson” submits:
The long-term chart shows the history of the SP500 and earnings per share from 1928 to 2000. What should be obvious is that economic history has produced a remarkable long-term trend of earnings at an annual 6.1% pace even with changes in political parties and wild swings in tax policies, spending policies, and geopolitical politics. Once again forecasters today predict the US is on the verge of political chaos and economic collapse with a new administration.
What is missing from every forecast ever produced in my opinion is that they never, but for perhaps Warren Buffett, ever relied on the resiliency and innovation of the individual citizenry to adjust to typically misinformed top-down government action and simply move forward with improvements in our standard of living. If one views this remarkably consistent chart in the light of historical perspective, rising/falling taxes, periods of war vs peace, failed government social engineering, over/under spending on defense, wild misspending on boondoggles which routinely favored one party vs the other and routinely defaulted/failed, you will come away with the impression that perhaps the US could do better without battling political parties and do better with less government. Missed in every forecast which always seem to lean on the perception of government control is a basic understanding of millions of individual accomplishments and invention which are responsible for the whole outcome regardless and often counter to government edict.
The US is what it is and has been since 1776 The US outperformed every other form of self-governance with all our warts. It is not that we could do better, it is, despite the daily handwringing and many attempts at self-immolation, US society tends to focus on business and even with political distractions has produced a remarkable record of success.
Investors should invest based on economics not politics. What is meant by economics is the basic desire of millions of individuals striving to achieve higher standards of living whatever conditions are presented If our economy is underperforming with significant unemployment, then the next few years will normalize as economic growth absorbs the unemployed. This will occur as it has always occurred though individual enterprise seeking outlets despite government intrusions. Individuals will start new businesses precisely because doing something better, faster and cheaper than it was done in the past always finds a home. Individuals now out of work will find employment because simply need to work as part of our self-expression and self-esteem. Economic activity will move ahead till the next speculative peak and markets will correct as they always have and we again adjust, pick ourselves up out of the rubble and the next cycle begins.
One can have faith in this process precisely because of the historical perspective which is there for all to examine. At the moment, the US is in economic expansion since exiting the COVID-19 Recession April 2020. Few seem to recognize this. With ~8mi still unemployed, we have roughly 3yrs-5yrs of economic expansion before we fully bring these individuals back into the fold and satisfy the economic demand which follows. We have fairly reliable indicators guiding us which support this scenario. Unexpected geopolitical events can always produce short-term disruptions, but we have always successfully maneuvered these and our own errors in judgement in the past and we should trust our ability to so even though we do not know what they may be.
The SP500 record shown is the record of millions of individuals seeking higher standards of living. You can trust this to repeat!
