Dear Valued Clients and Friends,
This will serve as the last Friday Dividend Cafe of 2025 (we will still have our normal Monday Dividend Cafe this coming Monday, the 22nd). The next two Fridays fall right in the holidays (Christmas and New Year’s), and we want to leave you alone for the holiday weekends. The week between Christmas and New Year’s will be consumed by one of my favorite annual writing assignments – the Year Behind, Year Ahead Dividend Cafe will hit your inboxes on Friday, January 9. It is my chance to hold myself accountable for last year’s analysis and to look ahead to what 2026 will have to offer us. When my mindset becomes engulfed with this annual “white paper,” I truly know the holiday season is here. =)
But today’s Dividend Cafe is one I hope a lot of people will bookmark. Rather than a mere review of what transpired in 2025 (where I realize we still have eight market days to go), I want to call attention to the fact that with 2025, we are officially a quarter-century down in this new millennium. I understand that 2025 is actually the 26th year of a year that starts with 20-__ versus 19-__, but I think many of you know why the first year of a century ends in 1 and the last year of a century ends in 00 (IYDKNYK). So 2001-2025 were the first 25 years of this new century, and something about that seems rather climactic to me.
For me, 2021-2025 was basically the major years of my adult life (so far). I was married in 2001. I began working at UBS (Paine Webber) in 2001. I have spent 25 years now in a financial services career. This new century has managed to pack just a few noteworthy events into its first 25 years. And it occurs to me that if investors cannot learn one particular lesson from these 25 years, they may never learn it.
Today in the Dividend Cafe, we are going to look back at very recent history (25 years is not that far back), and learn the one investment lesson that history, reality, and the very nature of things require us to know if we are to be successful investors. To that end, we work.
Let’s jump into the Dividend Cafe!!
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Y2K was “Why Too Krazy?”
If we want to look back at the first 25 years of this new century, it may be incumbent upon us to remember how badly it was supposed to go. Before we ever got out of the gate (where we would then be able to get to the real trouble), a couple of missing digits of computer code were supposed to bring down the electrical grid, the banking system, the Pentagon, our access to water, and a few other daily necessities of life. The forecasts ranged from “really bad” (the moderate folks) to “cats and dogs are going to fall out of the sky onto your head” (the folks the media chose to showcase). The hysteria ended up being one of the most embarrassing fearmongering attempts in history, where a whole lot of people learned a lesson that would be useful to remember for the future:
“People respond to incentives.”
It turns out that a known problem – known by every single person with any skin in the game of the problem in God’s green earth – was NOT interested in running out of water and power and having ATM machines not work, and somehow, someway, with ample time and money to spend, they, ummmmm, fixed it. Who could have seen that coming?
This is not a case of me mocking this whole thing now with the gift of hindsight. In 1997, I had a huge argument with one of the leading Y2K fearmongers in the world about it, and by 1999, I was convinced some people had lost their ever-loving minds. I am glad I learned this lesson about the capacity of people to become unhinged at this stage of my life. It would come in handy later in my life and career, on multiple occasions.
But anyway, I just wanted to say that the morning after we launched this new century, the focus was not, it turns out, on the death of civilization from a computer malfunction, but rather the atrocity of Stanford being in the Rose Bowl and a series of thrilling overtime bowl games.
I’ll Give You Something to Worry About
If Y2K did not destroy financial markets, a dotcom/tech/Nasdaq bubble popping surely could. And pop it did. And destroy it did. With bravado. And in March of 2000, the Nasdaq reached 5,132, having more than tripled from its 1,500 level in October of 1998. You are reading this correctly. The violence in the sell-off of the Nasdaq (it would be down -50% by November of 2000, in time for the Presidential election, and down -77% by the time it hit its 2002 trough) was not the only market violence of this 2000-2002 period. What started as the unwinding of completely irrational exuberance in one over-invested, over-extended, over-estimated sector of the market would eventually become much broader.
Bubbles lack definition and certainly precision until they burst, a difficult concept in finance to grasp. Alan Greenspan has taken a lot of criticism for saying, essentially, that bubbles cannot be identified until they burst (he did not actually say that, but he did argue that “there is no simple way of determining whether asset prices are overvalued” His point was that what looks like a bubble ex ante can often be explained by other circumstances, and that a central bank risks doing more harm than good by intervening. Now, this cannot be a defense of a central bank facilitating irrational behavior through excessive easing, margin facilitation, and accommodation of financial speculation through a distorted and unnatural cost of capital. If you take what I am about to say as a defense of Fed accommodation of bubbles, you have not read me over the last 25 years. However, the simple statement of fact that bubbles gain their identification after they burst is tautologically true. Calling something a bubble before it bursts is called an opinion. Those opinions are often validated after a burst, but the labeling only gains precision and legitimacy ex post. Bubbles do exist. And dotcom was one of them. And it was a bad one, a really, really bad one. I say that with the 20/20 vision hindsight has afforded me.
Back When Our Politics was Dysfunctional
I know everyone today lives in a period of political bliss, where there are no accusations of stolen elections and where our political disputes are moderate and limited (it pains me to write with such deep and intended sarcasm), but we forget that, once upon a time, we did not know who the next President would be for 36 days. Once upon a time we had a Presidential candidate call his opponent o concede, then call back to un-concede, and then it all had to go to Supreme Court. Ancient history, right? That Bush v. Gore stuff almost seems like child’s play compared to the nonsense we deal with today. But it was historical, profoundly unsettling, and unprecedented.
And while the market was down -6% throughout the escapade, it is actually somewhat disingenuous to pin that on the uncertainty of that election outcome and the Florida vote issues (eventually settled by the Supreme Court). The market was already in a bear market, and that quarter’s earnings season was especially horrific. The Fed Funds rate was a stunning 6.5% that whole year, and the Fed did not begin cutting until early 2001. In other words, that election debacle surely added to market volatility, but an extra -6% drawdown is (a) not that much considering we had no idea who the President was, and (b) explained by plenty of other things, too.
(Separate point unrelated to Dividend Cafe but flowing from the political junkie part of David Bahnsen: The true lesson of Bush v. Gore was not about the Supreme Court, hanging chads, or any of the other iconic components of that experience … It was and is this: If you are ever in a political fight for your life, and you can either have James Baker on your team, or not have James Baker on your team, pick the option where you have James Baker on your team. And if you want to throw money away, bet against Jimmy Baker and see how that goes for you.)
But again, if I tell you that the century is kicking off with a tech sector meltdown and then a Presidential election that would test the nation’s mettle for 36 long days, you would be forgiven for being concerned.
It is Nowhere Near Done
If the tech sector meltdown and the bizarre Bush/Gore election saga were not enough, 2001 and 2002 would not make things any easier. The country endured the worst attack on our own soil on September 11, 2001, not only killing nearly 3,000 people and creating hundreds of billions of dollars of damage, but also calling into question one of the major factors of the prior decade’s robust performance in markets: the peace dividend. If the post-Cold War peace dividend was obsolete, shouldn’t markets reprice entirely to reflect this new reality? Would jihadist terror attacks on American soil become a part of our way of life? Were Warren Buffett and Vice President Dick Cheney correct that a nuclear attack on America was inevitable? Markets were fully closed for four days (the longest since the Great Depression), and when they did re-open, many wished they had stayed closed. The market dropped -7.1% on its first day re-opening and was down -14.3% for the entire week. Obviously, some sectors took it worse than others (airlines, insurance), but it was a risk asset debacle met with some dramatic Fed rate cuts (hey, if you aren’t going to fly for a bit, you may as well take out a HELOC and go to the mall … what could go wrong?).
Well, it can’t get much worse, right? It isn’t like the Fortune Magazine “Most Innovative Company in America” (for six consecutive years!!!!) was about to implode in the largest accounting scandal in American history. Oh wait. Well, at least Enron would be the worst of it, right? I mean, who really pays attention to those Energy companies in small cities like, ummm, Houston, TX, anyway? Major cable companies and telecom companies wouldn’t be caught up in this mess, would they? Adelphia. MCI Worldcom. Global Crossing. The hits just kept on coming.
But hey, they got Martha Stewart! I am sure everyone felt a huge sigh of relief after that.
The country’s safety was in question. The safety of all public accounting was in question. Arthur Anderson was left to die. The dotcom bubble burst had hammered a generation of investors. The country entered into a mild recession. It was a brutal few years to start off the new century. All three market indices would “trough” in October of 2002, with the S&P 500 down -49% from its high, the Nasdaq down -78%, and even the Dow down a horrific -38%. The total drawdown also lasted 31 months, with ample attempts at a rally in between, but none that held. The S&P went from 30x earnings at its peak to below 15x at its bottom.
But, alas, the market did bottom, and now everyone had learned a lesson. Never again would investors buy into a bubble, never again would people blindly trust insane, leveraged numbers. Never again would neighbor envy drive investors’ decisions. Never again would investors ignore valuations. Numbers were trustworthy again. We were bruised but are now much better off in terms of our investor maturity, right?
The Mother of Them All
The market would actually improve by +100% from late 2002 through mid-2007. Now, let’s not get too excited … math is a funny thing. Down -50% then up +100% equals: +0%. Try this with real numbers. $100 is down 50%, so it is now … $50. That $50 is then up 100%, so it is now … $100. But again, the market had rallied 100%. And what provoked the late 2002 recovery? Well, for one thing, valuations had flushed out. 30x was perverse. 18-20x was still too high. But 15x, with a recession behind us, was pretty buyable. But what would drive “animal spirits”? How about the biggest home-buying and home-borrowing binge in human history? Fueled by very low interest rates and an insatiable appetite in the capital markets for new loan origination, property values rose, and homeowners’ ability to extract that equity drove wild consumer behavior.
One man’s Pets.com is another man’s Vegas condo. But alas, is it really all that different?
Stocks were only back to where they had been seven years earlier, but residential real estate was multiples higher than it had been, and various financial companies, real estate companies, and other adjacent sectors were living it up.
And then Bear Stearns went down. And then Fannie and Freddie went down. And then Lehman. Then AIG. Then Merrill. Then Wachovia. Then Washington Mutual. And it wasn’t even October yet. The 2008 financial crisis was the seminal moment of my career, but it was also the seminal moment for our nation in the new century. I have believed for some time now that the financial crisis was the point at which so many other things changed in our country, besides the obvious things directly related to the crisis itself (essentially, left-wing and right-wing populism became mainstreamed in the aftermath of the crisis). But as for investors, the S&P 500 would drop by -57% from October of 2007 through March of 2009, essentially bookending the first decade of this new century with two roughly 50% drops. Good times.
The market would begin recovering on March 9, 2009, but it would not recover its 2007 high until 2013. Along the way, the nation’s financial system would change forever, with certain household-name Wall Street firms going away, many others being absorbed or saved by competitors, and a new regulatory framework would surface that entirely changed the financial system of our country, forever. And all of that would pale in comparison to how things changed with our central bank with a period of “zero bound” interest rates that would essentially last the next fourteen years, and the Fed beginning a new “liquidity” strategy whereby the Fed would flood the financial system with excess reserves by using its balance sheet as a policy tool (from the Japan playbook).
There were many, many moments in late 2008 and early 2009 when it felt like “this time was different.” And while the market may not have made a new high until 2013, the 100% move higher from 2009 to 2013 was perhaps the greatest reinforcement for investors in history that getting cute with timing can be fatal. The number of people in this moment who got out at or near the bottom (peak panic), and could not bring themselves to get back in for a long, long time, is legion. And it is a mistake that should be used to ensure it never happens again.
A Recovery Decade
Two things can be said about the 2010-2019 decade that followed:
- It was a fine time to be invested in risk assets
- It is a lie that there was no pain or opportunity for bad behavior along the way.
Yes, the S&P 500 was up +255% over this time period, and yes, that represents a nearly 14% compounded annual return. And yes, it happened with significantly lower annualized volatility than historical averages (that is, a 12% annualized standard deviation versus a 15% historical average, for those who care about such mumbo jumbo).
But allow me to make the point that actually matters about 2010-2019 … The “PTSD” from the financial crisis was intense, and the decade was not free from the type of violent drawdowns that give investors real pause and heartache. The “flash crash” of 2010 saw a 10% drop on May 6, 2010, in a single day. The European debt crisis of summer 2011 saw the S&P drop -19.8% in half of a summer. January 2016 saw a 14% drawdown amid fears about China, which quickly recovered. And Q4 of 2018 saw a 20% drop in the market (going into Christmas Eve, no less) behind the dual threat of a trade war and a tightening Fed. The total return of markets was what it was, and the normalized volatility along the way was better than average. But that is very different from saying that there were not ample excuses to fear the news cycle. When you look at the above market distress events and ignore the numbers, consider the headlines that accompanied them all …
- “Markets in free fall as market stability collapses”
- “Europe on the brink of financial extinction”
- “The Euro nearing collapse as Portugal, Italy, Greece, and Spain faced financial crisis”
- “U.S. credit downgrade calls into question the safety of Treasury bonds”
- “Lost confidence in China’s entire economic and financial system”
- “U.S. credit markets freeze up in moves not seen since financial crisis”
- “Investors begin to adjust to markets without a Fed there to support them”
These various incidents always came with some form of truthful news headline (a real issue, of sorts), along with concerns about what it meant to market function, along with some suggestion of further contagion, along with the inevitable allure of “this time it’s different.” Some periods last longer than others. None of these events lacked casualties of bad behavior.
And Then There was COVID
By now, we are in the more recent history of it all, with the COVID moment on the one hand beginning to feel farther and farther away from our contemporary moment, yet still much more recent than things like Bush v. Gore or the dotcom implosion. I’ll spare you all the dirty detail nostalgia – it was not a month any of us want to re-live. But it would be market revisionism not to see it as a period where not only did markets drop over 30% in one month, but many, many people spent months and months believing that it was the beginning of the end. In fact, I remember “long COVID” doomsdayers predicting that this would linger over markets for years to come. I remember senior elected officials (I will not give names) telling me that we had very likely seen the end of ANY public sporting events or convention center activities or large concerts and public outings, ever again (yes, similar things were also said in Q4 of 2001 after 9/11). I remember people telling me New York City was dead (LOL). I remember people saying we may be stuck with 6-8% unemployment for 5-10 years. And I certainly remember people telling me that there would be millions of defaults in commercial real estate (the classic go-to for permabears when all else fails).
I don’t mention all these things to highlight the fringe or the particularly dramatic … I mention them because they were highly normal thoughts, emotionally, in the uncertainty of the moment. I have the luxury of looking back on some of these calls (long COVID??) as silly and unfounded because we now know none of this happened. It does not mean that there is no emotional rationality to various thoughts and fears about the COVID pandemic.
But yes, markets would recover, and in fact, do so more dramatically than any anticipated.
The Worst Year of All Time?
As far as the S&P 500 goes, 2022 was only the 7th worst calendar year in history – not exactly record-breaking badness. Down -19% on the year, 2022 was a bad year for risk asset investors as the Fed began tightening, it would go on to tighten more than expected, and the euphoria of the 2021 post-COVID recovery would wear off. However, with a -13% drop in the U.S. bond market, it would mark the worst year for bonds in history, and the combined result for stocks and bonds would mark the only year in a hundred years where stocks and bonds were BOTH down double digits.
The violence to equity investors may not have been that bad (in fact, dividend growth was up that year, and a -19% drop in the S&P is not that bad compared to the 70% or 90% drop in some “shiny objects” of the stock market). But the fact that “asset allocation” did not work that year, meaning the zigs and zags both went the same way, leaves 2022 as one of the worst years for many investors, ever.
And Then There was 2025
Markets have now enjoyed three robust years in a row, but again, not without some fireworks along the way – most notably the tariff debacle of April this year. A needed course correction (reversal) stopped the swoon, but a 5,000-point drop in four days was headed to another quick 20-30% drop in markets, with threats of a sustained (two-sided) trade war to come. Again, it didn’t last and “market discipline” worked (history has been consistent here), but the news moment was profound, and market impact in that moment was real.
Presidential Preferences
I did mention Bush and Gore earlier in this missive, but note the words that have not come up at all in my play-by-play of the first 25 years of this century: Obama, Trump, Biden. Markets over 25 years have seen Republican Presidents and Democrat Presidents. They have had dramatic moments to the upside with all of the above, and dramatic moments to the downside with all of the above. There have been bad policies from all, and some refreshing moments of sanity from all. Markets like certain policies (corporate tax cuts) more than others (tariffs), but it would be highly disingenuous to frame life for investors over the last 25 years around political leadership. It simply isn’t true. The new century so far has given us three Republican terms and three Democrat terms (Presidentially) – a literal tie. The Republicans have had the House majority for 16 of the 25 years, while Democrats have had a Senate majority for 14 of the 25 years. It would be hard for all of this political stuff to be more “even” mathematically than it has been.
And the world keeps on turning.
So What do we Make of the Whole Thing? 25 Years and Our Lesson is …
You can revisit the highlights of the last 25 years if you’d like, but no one can claim it has been anything other than quite unsettling. From various asset bubble implosions to paradigmatic changes on the world stage, the new century has not launched with an excess of peace and stability. Had I sat any of you down with a crystal ball 25 years ago and laid out nothing but the news events that would mark this quarter-century period, from financial crises to political upheaval to global pandemics, it is unfathomable that anyone would enter as a market bull.
And yet, if you left that crystal ball meeting by dropping $1 million into markets, you’d currently be sitting on $7.5 million.
“Well, that is because markets outperformed their own historical averages over the last 25 years.”
No, it isn’t. Due to the horrific results of 2000-2009, markets are well below their historical average for the last 25 years. Now, the 2010-2025 period is well above its own average, but the first decade was so below that the total period is only about a 7% return, well below its own ~10% average.
I could have saved you 4,000 words of reading by just saying this from the outset: Instability is normal. Citing instability as a reason to be uninvested is clinically insane.
If anything has been materially obvious in the last 25 years, it is that attempts to identify systemic concerns or pockets of economic, financial, or political instability as reasons to fear markets are a money-losing endeavor – one with a massive opportunity cost that has confounded investors for decades.
I don’t have a prediction for you about what will happen in Western Europe in the next 25 years. I can say, it doesn’t look good. I do not know how bad American political dysfunction will get. I do know, I am not enjoying this. I can’t imagine the U.S. valuations in AI and big tech end well. I’ve been saying that for some time now. The China situation doesn’t feel good to me. Their economic and cultural reality is not good, and I have no reason to believe the CCP will behave well as things worsen. The Fed has taken on a deified role in financial markets, with no regard for unintended consequences. The U.S. national debt is a debacle, with both parties apathetic about how it will go.
Who can be bullish?
Anyone who has paid attention to the last 25 years, for one. Change all those examples of fear and trepidation above with the real-life variables of the last 25 years – dotcom, 9/11, Lehman, COVID, etc. And note the 7.5x return on one’s money throughout.
And then let the inevitable, “well, this time it’s different” thought enter your head. Tell yourself some new moment is coming, or something different that truly wipes away civilization is on the brink.
After all, the next 25 years will need its example, too, of how we can better inform and prepare the 25 years of investors who will follow. Someone has to be the example of “what not to do.”
But in all seriousness and with all love and concern, I gently suggest that the first 25 years of this admittedly unsettling century provide all we need to know about the dynamic of risk asset investing. The profit motive, the reality of how goods and services are produced, the uncanny ability of our best and brightest to steward capital towards its most rational use, and the blessing of free enterprise, leave me unaffected by the things that are bad, or the bad things that might happen. What I do know is this: Every bad thing you can point to enhances the expected rate of return for patient investors. If every person in the world adopted the right mentality tomorrow, the risk premia for equities would collapse. But on this side of glory, the inevitability of “bad things” has boosted risk premia, and this makes the bad things a feature, not a bug.
All things being equal, I see dividend growth equity investing as a vastly superior way to be exposed to these market dynamics and realities. Sure, one could “ride out” what it all means for an index investor. But I believe that for those who need their portfolio to generate income, the ever-rising cash flow of dividend growth neutralizes the paradox of withdrawing from a declining portfolio. And I believe that for those who are accumulating capital, dividend growth turns market volatility, even sustained downside volatility, into a huge compounding opportunity. It is the best combination of offense and defense I have encountered as an investor, period.
But even that becomes moot if we do not learn from history.
My prayer for the next 25 years would be no more 9/11’s, no more asset bubbles, and no more pandemics. But alas, I know we remain in a fallen world.
But I know one thing people will want in the next 25 years, if they can get it … The same return from risk assets the disciplined, wise, and prudent got these last 25.
And my friends, to that end, I will work for the rest of my adult life.
Chart of the Week
This chart cheats a little with the subject of this week’s Dividend Cafe. I am writing above regarding 25 years, and this chart adds an extra decade to the analysis. But if 41x your money since I was in high school is either an argument that the whole world got really easy, peaceful, profitable, and uneventful since then, or it is an argument that markets represent a truly potent force for seeing through the realities of a volatile world, and monetizing those very realities – for those who get it.
Quote of the Week
“Stocks rarely perform in the time frames we predict, and it’s why the market only works for investors that have more patience than they thought they would ever need.”
~ Ian Cassel
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I do wish you and yours a truly wonderful holiday season and a very Merry Christmas. I hope it is a magical time of year, filled with family and friends, and all the things that make our lives meaningful, special, and memorable. One of the great blessings of my life is writing this Friday Dividend Cafe for you all each and every week. I do not take it for granted. One of my New Year’s resolutions is absolutely to bring a better Dividend Cafe to you each Friday next year. I love writing it, but I also feel the constant burden to do better and to be better. Thank you for allowing the Dividend Cafe to fill up some space in your inbox and in your calendar.
And with that, Merry Christmas, and Happy, happy New Year!
With regards,
David L. Bahnsen
Chief Investment Officer, Managing Partner
The Bahnsen Group
thebahnsengroup.com
This week’s Dividend Cafe features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet
