In 1913, John Paul Jones of Cornell University shocked the world by running a mile in 4 minutes and 14 seconds, breaking the world record.
“No one will ever be able to run a sub-4-minute mile”, people speculated at the time. How could someone possibly shave off 14 seconds from the time of the fastest runner the world had ever seen? It was unfathomable.
Lo and behold, 41 years later, Roger Bannister of Britain did the unthinkable. He ran the mile in 3:59.
Since Bannister crossed this threshold in 1954, 1,775 athletes have run a sub-4-minute mile, with the world record now standing at 3:43 (by Hicham El Guerrouj of Morocco in 1999).
How did El Guerrouj beat John Paul Jones by 31 seconds? The answer lies, quite simply, in progress. Incremental advancement & improvements were made in nutrition, running mechanics, and shoe technology, and more effective training techniques were employed.
In 1913, it would have been laughable to tell someone that John Paul Jones’ record would be annihilated by 31 seconds. But even something as ancient as running can see significant improvement over a relatively short time.
All-Time Highs
Recently, cable TV has been full of headlines flashing that stock market indices have hit all-time highs.
When we see these headlines, it often elicits either… 1.) Euphoria, or 2.) Thoughts of “this can’t be sustainable… the market has to drop from here.” This article is set to address position #2.
For many, there is a general sense of “what goes up must come down.”
Imagine a child takes his first two or three steps, tumbles, and then we say, “He’s bound to mean-revert… no way he’ll continue to take three steps at a time.”
Of course, we wouldn’t say that. We instead cheer him on and expect him to take four or five steps next week.
We were made for progress.
What History Tells Us
History is quite clear – the stock market (as measured by the S&P 500) spends most of the time near an all-time high. In fact, over half of the time, it is within 7% of an all-time high.
*Source: Bespoke, Think Big Blog, January 23, 2024
Why does the stock market constantly seem to be near an all-time high?
Fundamentally, the stock market progresses upwards (over the long run) because the underlying companies increase their profits. Profits rise because these companies either grow revenue by creating new, better, or more expensive products/services or they decrease their expenses.
It is critical to remember that when someone talks about “the market”, what they are really talking about are real businesses with real cash flows with real people with real innovation.
These great businesses are resilient and dynamic. A spirit of grit, determination, and constant improvement is what inevitably leads to innovation and efficiency, which leads to more profitable businesses, which leads to a higher market over the long run.
Still, some might wonder if they missed the opportunity with markets near all-time highs. A picture speaks a thousand words here.
*Source: Factset, J.P. Morgan Private Bank, Data is as of August 27, 2020
The “What If” Trap
Despite the improvements (often gradual) seen all around us, it’s easy for us to shift into “What-If” thinking.
• “What if the other candidate wins the election?”
• “What if war breaks out?”
• “What if gas prices skyrocket?”
• “What if a deep recession hits?”
Our brains are hardwired to think of the negative what-ifs, and it’s easy to forget about the positive improvements.
I love what David Bahnsen had to say about this in his May 28th edition of Dividend Cafe:
“The Law of the Invisibility of Good News: Progress happens gradually and imperceptibly, while regress happens all at once and immediately grabs our attention.”
and
“the sources of positivity that ought to inform our disposition are more gradual, less sensational, and therefore, can become less prominent if we are not more diligent.”
Valuations
To be clear, human progress does not automatically mean stocks should always and forever go up without regard to current valuations, geopolitical and economic risks, or current trends. Investors must be vigilant about the price they pay for a given company, and they must investigate the risks with that investment. Valuations certainly matter, as one of the largest determinants of future returns is the price you pay on the original purchase. For more context I would encourage you to read Trevor Cummings’ article from March.
Incentive to Innovate & Grow
But while the broad market can be relatively cheap or expensive at various times, human progress wins out in the long run. Free enterprise still incentivizes the technology company to create & sell more widgets, the restaurant to sell more burgers, and the airline to sell more tickets. It also incentivizes the healthcare company to improve outcomes and the shoe company to make better shoes.
In the financial services industry, we see progress being made in the form of investor access. A simple stock trade used to cost a small fortune, and now stock trades can be made instantaneously, most of the time at no cost. Similarly, access to private market investments used to be for an extremely small subset of the population, with commissions that would make your eyes water. Today, innovation in financial markets has led to investor-friendly strategies, allowing access to private markets exposure with no commissions and very reasonable management fees.
Half Full or Half Empty?
Markets don’t go down just because they’ve hit all-time highs. Markets are forward-looking mechanisms, often viewing a future that is full of opportunity.
Over time, shareholders of companies with strong balance sheets, robust free cash flow, and reasonable valuations have been able to benefit from the innovation and creativity of fellow workers, which has led to progress, growing profits, and a rising stock market.
We can choose to hedge our bets based on a future unknowable catastrophe, or we can choose to let history inform our decision-making.
Although it’s hard for us to envision what the future will look like (just like people in 1913 couldn’t fathom a sub-4-minute mile), history has proven pessimists wrong time and time again.
“Pessimists sounds smart. Optimists make money.” Nat Friedman
Blaine Carver
Private Wealth Advisor
bcarver@thebahnsengroup.com
Trevor Cummings
PWA Group Director, Partner
tcummings@thebahnsengroup.com
