The Economy Waits for No One

History can be a great teacher if we let it. Mark Twain once wrote: “History does not repeat itself, but it often rhymes.” Higher interest rates and the near-perfect predictor of the infamous inverted yield curve (short-term interest rates higher than long-term rates) sent ominous signals last year. The investing textbook said we were supposed to already be in a recession by now. Contrary to expectations, the S&P 500 advanced 26% last year, tacking on another 10% so far year-to-date. This wasn’t supposed to happen. If you are trying to make sense of it, maybe some history will help.

 

 

In his book, “Americana: A 400-year History of American Capitalism”, Bhu Srinivasan does an excellent job of tracing the evolution of the American economy. Preceding the Civil War, the South stood as the nation’s economic powerhouse driven by cotton and slavery. Despite the North’s rapidly growing population and the California gold rush in 1848, the South still dominated the country’s economy. According to the National Bureau of Economic Research (NBER), the US economy reached $4.1 billion in 1859. In that year, the cotton crop was worth 4x the federal budget, and the slave trade was reported to be worth $3 billion on its own. If you were an investor in 1861 and watched the country go to war, you could probably foresee that if the South lost it would be devastating to the economy. Your reaction would probably be: “Just give me a few gold bars and let me come back in about four decades.” It didn’t take that long, by 1878 GNP had reached $6.4 billion, doubling from its pre-civil war level according to NBER. The lesson here seems to be that even in our darkest hour, the economy adapts.

 

 

Like the economy, politics can also go through some profound transformations over time, and one could easily wonder how we got to where we are now. Being scared or nervous would be a normal response. Srinivasan again illustrates how much things can change. Prior to the Civil War, Democrats were the party of the South and the Confederacy. There was only one Democratic president from 1860 to 1910, the population favored the North and the Republicans. If you were waiting to invest until your party gained control in the latter half of the 1800’s, it was extremely costly. GNP grew from $4.1 billion in 1859 to $21.8 billion in 1908.

 

 

The world always has problems, and we have plenty now if that is where you want to focus. The temptation may be to wait until the country appears to be a little less chaotic, then invest. But again, recent history shows the danger of that line of thinking. In 2013 our economy was at $17 trillion and corporate earnings for the S&P 500 were $107. By the low of the pandemic in 2020, the economy bottomed out at $19.9 trillion, and earnings were $122. Just four years later GDP has now reached $27.9 billion and corporate earnings are $213, with 2024 estimates at $240. Only time will tell if this year ends that well, however, the economy waits for no one.

 

 

The lesson from history is that the economy is resilient, adapting and moving ever higher, even when the horizon appears to have some very dark clouds on it. Srinivasan also has a chapter in his book on the evolution of the media and the daily newspapers that were published in the late 1800s. Most daily papers at the time were somewhat boring, many would just report entire political speeches or describe events. Joseph Pulitzer changed the game by creating a more entertaining approach and focusing on the mostly negative drama of the day. His readership increased dramatically. Unfortunately, we probably have Joseph Pulitzer to thank for all the negative news that we are bombarded with today. Yes, a recession will come, they always do. However, nobody knows exactly when. It could be tomorrow or years from now, but the media will be sure to remind us that whatever our situation is, it is surely about to get worse. They always seem to spend less time on the solutions that may solve the problem. Warren Buffett seems to understand history, his advice is: “Don’t bet against America.” Our country has been through countless challenges, and it continues to survive. This might be the best explanation as to why the stock market seems to ignore the obvious uncertainty ahead. This is not a prediction that it is clear sailing from here, but that we inevitably sail through the storm. One of the few guarantees in life is that the media won’t pick the bottom, but with the American economy, you don’t have to.

 

Observations On the Market No. 393