Dear Valued Clients and Friends,
Markets took the last two weeks of August to drop -2,500 points, though prior to that, they had been up +4,000 points from the mid-June low levels. But August 15-17 saw the Dow close right around 34,000 each day, and we ended August just two weeks later at 31,500. Now, 1,000 points of that decline happened just last Friday, the 26th, but even this last week saw declines each day but Thursday. As of press time this morning, with the Jobs number for Friday coming in at +315,000, markets were up +300 but now have gone negative (though the trading day is not over, and we are headed into a holiday weekend).
Why in the world would I waste the precious pages of Dividend Cafe to recap day-by-day market action when this hallowed ground is supposed to be reserved for what actually matters in markets (and life)? Because we are entering football season, of course, and how this all connects is about to be readily apparent to you.
Jump on into the Dividend Cafe!
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David’s Dividend Cafe
It has happened before that I will use Dividend Cafe to wax and wane biographical, or anecdotal, or historical, or personal. Whether it be my experience through the financial crisis, or my personal remembrance of 9/11, or sharing the experience of my lifetime fight for vision, or my own experiences with residential housing, and I am sure more I am not remembering right now, I will vary from the normal weekly routine every now and then if I think it connects to a broader investment or economic message I want to share.
Now, the risk I take is that some who read this for the down and dirty investment musings may be really bored by my personal diatribes. I have always countered that concern by remembering that, well, this is my Dividend Cafe. I can write about whatever I want. =) And in all seriousness, I do actually take very seriously the desire to connect, inform, and edify the readers every week. If I don’t always pull that off every week for 100% of readers, well, Abraham Lincoln had a quote about that once …
This Weekend’s Context
We have spent a summer deep into markets. I know I personally have read over 5,000 pages of research this summer, literally. I have written thirteen Dividend Cafes since June began and written 47 of the last 51 DC Today’s … There may be room in there for the occasional joke or distraction, but for the most part, it has been a pretty serious summer of market reflection as the Fed has tightened monetary policy, questions about inflation have raged, and concerns about recession have been the talk of the town. I do hope the commentary has been useful.
This weekend is not merely the “end of summer” but also the beginning of football season. I have never hidden my love of football from readers or clients, particularly my real passion for college football embodied in my love for the USC Trojans. Without diving too deep into my life and schedule, let’s just say I don’t do a lot outside of work and family. And that is fine by me – I love my work, and I love my family, and I don’t feel the need for a ton of “extracurricular activities” (some people’s volume of extracurricular activities are, shall we say, impressive). But if I do have one thing I truly love outside of the combat of work and the joy of family, it is USC football. I will explain why and where this connects to markets momentarily.
But tomorrow, USC’s new season kicks off in the Los Angeles Memorial Coliseum. Even though the opponent is underwhelming (Rice – sorry, Rene!), we have a new coach, a new quarterback, a ton of new players, and are coming off of a rare awful year. So expectations are high, and anticipation is higher. I just figured, why not connect the excitement of this moment to the Dividend Cafe?
Markets are not new
Markets have existed since the beginning of mankind (a market being what organically happens when two or more people are free to be, something more people should learn). But the Dow Jones Industrial Average began existence as a market index in 1896, which would actually be eight years after USC began playing college football in 1888. So there is a long history of both public equity markets and a long history of USC football.
Starting off life the right way
I was born at Torrance Memorial Hospital and lived in Manhattan Beach, CA for the first two years of my life because I was born to a USC graduate student, my late father, Dr. Greg L. Bahnsen, who was completing his Ph.D. at USC in the early years of my life. The timing was perfect because I was born on May 30, 1974, which gave me exactly six months to grow up a little bit in time for the November 30, 1974, game against Notre Dame. And on my sixth month birthday, USC delivered one of its most famous games of all time, with the “17 minutes that shook LA” … Down by a score of 24-0 just before halftime to rivals Notre Dame, USC poured on 55 unanswered points in exactly 17 minutes to turn a blowout into, well, a blowout (the other way). I would love to say I will never forget it, but you probably will roll your eyes and say, “geez, he expects us to believe he remembers something from when he was six months old?” – so I won’t say it (but I do think it is true – either I remember it, or the 1,000 times I have watched the video of the game – it’s one or the other).
The markets didn’t have Anthony Davis
Markets were not so blessed in 1974 and could have used a little Fight On … Coming off of a -16.58% year in 1973, the Dow dropped -27.6% in 1974, making it one of the worst bear markets in history. Inflation was high. Unemployment was high. Gerald Ford was President. The Vietnam era and exit were demoralizing. Oil prices and oil embargoes were devastating. It was a painful era for investors.
Markets were up +38.3% in 1975. We haven’t had a year up so much since.
They were up another +18% in 1976.
Sometimes you are down 24-0. And sometimes you score 55 unanswered points very quickly. Timing your comeback can be hard. It’s best just to stay in the game.
A season ticket holder in Kindergarten
In 1978 I was four years old and outside the state of California as my dad was a professor at an out-of-state seminary in the south. And speaking of the south, USC went into Alabama in 1978 and beat them, causing both teams to be named national champions that year (this is the day of split polls, no BCS and certainly no playoff). And you know, nothing makes more sense than two teams with the same record sharing a national championship despite one of those teams actually beating the other team on their home field). But regardless, USC won yet another national championship in 1978 as I completed my fourth year of life, and as my family relocated to Southern California in 1979, expectations were high for the next season.
Someone graciously donated some season tickets to my dad (suffice it to say, starting a church that year from scratch and doing adjunct professorial work was not going to afford him the tickets), and I was hooked. I mean, hooked. Charlie White won the Heisman Trophy. USC went 11-0-1, with the one ghastly tie costing us a national championship.
The market was up a tad (+4%), but that was coming off of a down -3% year the year before and a down -17% year the year before that. Far more importantly, interest rates closed that year over +10% as high and persistent monetary inflation lingered. The economy was in a state of malaise. Morale was as low as could be. And investors were getting decimated in the bond market, and not exactly having a great time in the stock market. Gold investors were feeling pretty good about themselves as gold went from $227/ounce to $524 (this was back when it still seemed like gold was a hedge against inflation).
Something had to change for the U.S. economy. Something had to change for U.S. investors.
The 1980’s and the 1990’s
There were a lot of great moments for USC football in the 1980s and 1990s. Marcus Allen won a Heisman Trophy in 1981. USC would beat Ohio State in the Rose Bowl in 1985 and Michigan in the Rose Bowl in 1990. There were a ton, and I mean a ton, of great players that went on to massive NFL careers. And I was obsessed. But it was a long stretch of not winning national championships and not being in the upper echelon of college football perennially. There was a nasty losing streak to Notre Dame. There was a carousel of coaching changes from John Robinson to Ted Tollner to Larry Smith to, well, back to John Robinson again.
Things were not so bleak in the markets. The Dow ended the 1970’s at 838. No typo. The Down was 838. By the end of Reagan’s first term, it was 1,211 ( nearly 50% higher), but by the end of the 1980s, it was 2,753. So the market more than tripled in the 1980s even as USC was beneath its 1970s decade of dominance level. Despite a recession in 1980 with declining GDP growth (-0.26%), a “double dip” in 1982 (-1.80%) when the boneheads in Congress pushed out Reagan’s tax cuts instead of starting them that year, economic growth was massive in the 1980s, averaging +4.42% real growth from 1983-1989.
Reagan survived an assassination attempt, the country survived a double-dip recession, and USC survived an up-and-down decade. Markets thrived. The economy soared. And going into the 1990’s, the good times were only getting started in markets.
Some excesses got quickly purged in 1990, high yield froth was taken out to the woodshed, a S&L crisis came and went, a recession came and went, and then after a down -4% year in 1990 that coincided with USC beating Bo Schembechler in his final game as coach at Michigan (we would later do that to Lou Holtz of Notre Dame in 1996), the markets would be up every single from 1991-1999.
Escape from reality
The 1995 season was a tough one personally. Keyshawn Johnson was a senior, and the apostates at Sports Illustrated decided to put USC on the cover of the magazine pre-season as national champion favorites. That, of course, meant we had no chance. We went on to lose to Notre Dame and UCLA in my father’s last year of life, BUT three weeks after his passing won the Rose Bowl.
USC football was and is one of the strongest connections I had and have with my late father. And in the years that followed, I was a single young adult who more or less never missed a game and had years where I pretty much went to away games as well. The team was not good in 1996 or 1997, but there were great times, and it was an escape from the difficult aftermath of losing dad.
1996-1999 were not good years for USC, but they were as good as things get for markets. Not just for companies like Microsoft, where people do stuff and money gets made, but even good for companies like TheGlobe.com, where I am not sure if they ever had a checking account. The tech era accelerated real economic growth (kind of back to that +4.5% real GDP range annually), and the market bubble made a pop culture phenomena of investor insanity.
The 2000’s
The new millennium kicked off with the Y2K whiff, the dot-com implosion, the worst USC year in a long time, the firing of Paul Hackett, and a general feeling that we lived in tumultuous times. Luckily everyone started paying double what houses were worth, and the Fed lowered interest rates a lot to make it affordable (good thing that would never happen again). And after a long period of political strife, we had a really easy-going election in 2000 where the courts got involved, and one side felt ripped off without justification (good thing that would never happen again). I got married in 2001. Pete Carroll was at our wedding (on the TV’s). And a whole new life was beginning. By “new life,” I mean only three things, in order:
(1) I was now a married man
(2) I was now a financial advisor at UBS Paine Webber
(3) Pete Carroll was about to take USC on the run of a lifetime
The markets began a 30-month bear market in March of 2000 and lasted until October 2002, but even as markets began to pick up life after the dotcom, 9/11, Enron, recession moments that launched this new unsettling century, so did USC began to show some life, beating top-ranked teams at home on the road, and generally playing their way into the upper echelon of college football.
Carson Palmer won the Heisman Trophy in 2002 (first winner at USC since Marcus Allen in 1981; we would win three Heismans in four years from there).
From 2002-2007 the stock market would go up almost +100% from its low to its high. The
USC would win the Orange Bowl vs. Iowa in January 2003 (Joleen and I were there). We would win the Rose Bowl vs. Michigan in January of 2004 (Joleen and I were there), with a national championship to boot. We would win the national championship with an Orange Bowl pounding of Oklahoma in January of 2005 (the very pregnant Joleen and I were not there). And after another undefeated season in 2005, we would lose the national championship with 16 seconds to go versus Texas in January 2006 in what was the most tragic and unspeakable sporting event that has ever taken place in history.
But that same year (2005), Joleen and I would witness from the hallowed ground of Notre Dame the Trojans skirt a brutal upset with a 4th and 19 miracle play for sixty yards and the “Bush push” with seconds to go to win the game – the greatest sporting moment I have ever attended in person.
Crises come in threes?
In 2006 USC would win the Rose Bowl. In 2007 USC would win the Rose Bowl. In 2008 USC would win the Rose Bowl.
Also, in 2008, the world would almost end. September of 2008 was a month I will never forget, as I have written about and spoken of for many years. The Great Financial Crisis was the seminal economic event of our lifetimes, and we will live through the repercussions for decades to come. The so-called “monetary” challenges we fight today (tightening conditions, rising rates, balance sheet reduction) are all hangover effects from the financial crisis. I understand people think it is the hangover from the COVID policy response, but that is an incomplete historical analysis. The COVID policy response was a continuation of the GFC policy response, which had never ever ever been remotely normalized. And here we are today.
As Lehman was going bankrupt, Fannie and Freddie were taken over by the Treasury Department, AIG became a governmental entity, and Merrill, Wachovia, and more fell prey to the horror of the moment, another tragedy played out on national TV from the streets of Manhattan.
I, of course, refer to USC losing to Oregon State on September 25, 2008, on the ESPN Thursday night game of the week. I walked out of Tonic Sports Bar on Seventh Avenue that night in a daze. Yes, the ambiguity over Morgan Stanley’s viability was part of it. But that loss to Oregon State (the only USC loss of the year) also cost us a bid for a national championship. But a third consecutive Rose Bowl win helped comfort me much more than TARP helped comfort markets.
Then what?
By 2009 the financial markets of the world began to heal, even as the economy was in brutal conditions. Unemployment would stay sky high, but not for Pete Carroll, who left USC to become the new head coach of the Seattle Seahawks (where he would go on to give them their first-ever Super Bowl victory). The most unfair and immoral NCAA ruling in history would follow against a USC program that apparently did not know they were supposed to be left for dead, beating Notre Dame on the road in 2011, beating top-ranked Oregon on the road in 2011, and ultimately beating UCLA by a score of 50-0 before having their season unceremoniously end.
Markets shook off a tough time that year as well, getting through the European meltdown and the U.S. budget and credit rating impasse to break even, and rallying like mad throughout the rest of the decade.
USC would go through four coaches in the years that followed (Kiffin, Orgeron, Sarkisian, and Helton), with some disappointing years, but also a Rose Bowl win for the ages over Penn State in January 2017, a Pac-12 championship in December 2017, and five wins in the last seven games against UCLA (and 17 wins in the last 23 of such games, by the way).
U.S. equity markets would not have a down year from 2009-2021 besides the “barely down” 2018, even somehow ending in positive territory in 2020 when they shut the entire world down for a few months and markets dropped -31% in 36 days at one point.
Not a contrarian indicator, just not correlated
You may have, at some point, wondered if USC was a reverse indicator of stock market health. After all, those 1970’s years were dominant for USC and brutal for markets, and as markets rallied in the 80s and 90s, USC was in a purgatory state. In the first decade of the new century, USC became the dominant team in college football, but the world suffered a bear market to start the decade and the great financial crisis to end it. The last decade was solid for risk investors even as USC went through [immoral] sanctions and a coaching carousel.
But a deeper dive reveals the truthful reality at play … There is no correlation here – especially not in individual years. Markets and USC football can, much to the shock of many, march to their own beat, non-correlated, providing no predictive value.
Where do we go from here?
Coach Lincoln Riley starts as the new head coach at USC this year, and we will soon see a Fed Funds rate over 3% for the first time since February of 2008.
Conferences are changing. USC and UCLA are both going to the Big 10 in a few years. Players can now receive money from sponsors and corporate employers. And European markets and economic conditions have underperformed for 15 years.
There are a lot of questions about how strong USC will be on their offensive and defensive lines. And questions abound regarding this “recession” talk, with strong employment reality but a general feeling of economic deceleration.
Here is what I do know. We have been through good coaches, bad coaches, tragic losses, and thrilling victories. There have been losses like the Texas game of 2006, sure, but there have been wins like that 1974 Notre Dame game, too. Good years, bad years; good seasons, bad seasons. It’s how it works.
And while the brutal market periods (1974, 2000 dot com, 9/11, 2008 GFC, 2020 COVID) are pretty hard to stomach, the ongoing engine of human ingenuity that is a free enterprise system is pretty resilient, too. I would bet against the economic opportunity of true risk-taking in an aspirational society as soon as I would bet against the Men of Troy.
In other words, my friends, don’t do it. It never ends well.
In good times and in bad times, just Fight on.
Chart of the Week
Quote of the Week
“I am a big believer in the ‘mirror test’. All that matters is if you can look in the mirror and honestly tell the person you see there, that you’ve done your best.”
– John McKay
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Okay. Thank you for indulging me. I hope it wasn’t too miserable for those of you who hate such variations, and I hope some of you loved or at least appreciated it.
Most of all, I enjoyed writing it. I enjoy being raised in USC football. I enjoy living with a Fight On mantra that is a core part of my ethos. And I love this time of year. So here’s to a great fall, a great season for my Trojans, and a great remembrance of market history. Its benefits belong to the patient.
Fight on!
David L. Bahnsen
Chief Investment Officer, Managing Partner
dbahnsen@thebahnsengroup.com
The Bahnsen Group
www.thebahnsengroup.com
This week’s Dividend Cafe features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet
