We didn’t start the fire
It was always burning since the worlds been turning
-Billy Joel
Agitated about the end of Western civilization?
Me too.
That’s why I listen to Billy Joel and “We didn’t start the fire.” The updated lyrics by Fall Out Boy are good, too. In a few minutes I’m comfortable remembering it’s just the pesky humans doing what they always do.
We’ll still be here tomorrow.
In the long run stock prices go up because we humans somehow manage to create more value than we destroy. Don’t ask me how that happens, but it does. Recognize that, and the best thing to do in the immediate term is nothing.
Doing anything else is likely to be a mistake.
Yes, I know. It doesn’t feel that way – at least not now, when markets are convulsing from tariff uncertainty.
Another fellow I like to listen to in times like this is Weston Wellington. He doesn’t sing. He’s an investment guy. I visited with him a few weeks ago. The visit wasn’t due to brilliant market foresight. It was for a chapter in a book I’m writing on Couch Potato investing for Wiley, to be published next year.
Risk vs. reward
Weston Wellington is the guy who speaks English at Dimensional Fund Advisors. Everyone else speaks finance-nerd. He has one of the super low employee numbers at Dimensional because he joined in 1984. Once based in Santa Monica California, the Dimensional headquarters now overlooks Highway 360 in Westlake.
About the stock market, Wellington says, “Stay in Your Seat.” This isn’t a statement of blind faith. It’s a review of the facts.
In his regular presentations to Dimensional clients he goes through decade after decade of scary magazine covers and newspaper headlines. All intimate the end is nigh.
Then he shows the score. According to the firm’s calculations:
- If you had invested $100,000 in 1970 in the S&P 500 it would have grown to $18,208,146 by the end of 2020, excluding expenses or taxes.
- If you had invested the same amount in riskless one-month Treasury bills you’d have $969,979.
And don’t forget, the S&P 500 rose an additional 64.1 percent from 2021 through 2024. That would bring your original $100,000 to in stocks to $29,879,568 or $1,091,964 in riskless Treasury bills —that’s a 27 to 1 beat!
Even if you adjust all those figures for inflation, the reward for tolerating angst is huge.
Are we really in a bear market?
Tune in your TV or your phone and we have unlimited access to voices telling us we’re in a terrible bear market. Having been an investor since the 1960s, I’d say they need a broader perspective.
Here are the figures.
- So far this year the S&P 500 has fallen 10.8 percent as of Thursday’s close, according to Yahoo Finance data, an amount that barely qualifies as a correction. But it is still up 2 percent over the last 12 months.
- So far this year Tesla (TSLA) has fallen a shocking 37.5 percent, well over the 20 percent threshold of a bear market. But it is still up nearly 46 percent over the last 12 months.
I could go on, but you’ll find similar juxtapositions in lots of places. The downs and ups are huge. But unless you started investing on January 1, 2025, chances are things aren’t so bad.
What happens in a real bear market?
The hard part here is that we have been in a bull market since 2009. What’s not to like? Millions of relatively new investors haven’t experienced a real bear market. Know this: It’s a lot more than a 20 percent decline in stock prices.
The worst bear market in my lifetime was 1973-74. It was a market that declined day after day after day. You’d want to sell one day but decide to wait. Surely tomorrow would be better?
But it wasn’t. The next day, the price was even lower.
People who retired thinking they were rich in 1968 were well on their way to being poor by 1975. While the Dow Jones Industrial Average lost 45 percent of its value, the “Nifty-fifty” growth stocks of the period lost far more. Polaroid lost 91 percent, Avon 86 percent. Even unstoppable Xerox lost 71 percent.
There was a moment in late 1974 when New York insurance companies were told by their state regulator to shore up their balance sheets. The event was, in effect, an institutional margin call, forcing the sale of more equities.
You know it is a deep bear market when many investors swear they will never own a stock again. And that’s why mutual funds that invested in stocks were mostly in net redemption for years afterward.
Reverting to the mean
Unfortunately, circumstances suggest that we may be at the beginning of a real “reversion to the mean” event. That would be a market in which stocks sold off well beyond their long-term average multiple of earnings and headed toward a historic low multiple of earnings.
Exercises with such figures come from different sources but the most frequent reference is to the Shiller CAPE Index. (CAPE is short for cyclically adjusted price-to-earnings ratio.) On April 8 it stood at 33.12, down from its December 2024 high of 37.71, but well over its October 2022 low of 27.08.
Just returning from the December high to the recent 2022 low implies a decline of about 18 percent. Returning to the long-run median value of the Shiller CAPE index implies a decline greater than 50 percent. And that’s just to median levels, not the lowest.
What would cause a huge bear market?
My best guess: President Donald J. Trump’s approach to tariffs. He is proving to be a one-trick pony. He has pushed the limits of bullying. I’m not alone in rejecting heavy handed tariffs. Just check Karl Rove on Trump’s tariffs in the Wall Street Journal.
Other nations are pushing back. Worse, as President Trump would put it, he “doesn’t have the cards” in his game with China. His hand is about to be called.
I hope I’m wrong.
The opportunity for young investors
The young have an opportunity. But older folks face danger if they are overcommitted to stocks. If you are young, a huge bear market is a massive opportunity to “buy low.” It would be a generational shift, improving the long-term futures of the young because stock prices will, eventually, go up. The longer it takes, the better their futures.
But if you are nearing retirement or retired, a huge bear market would make the retirees more insecure. For those who are overcommitted to stocks, this would be a good time be less overcommitted. That means being in the Couch Potato area of 50 percent equities, 50 percent cash/bonds.
Remember, the less you have in assets, the more you will depend on Social Security. It continues to be weakened by a crumbling economy and the relentless deficit building of both political parties.
Is our situation hopeless? I don’t think so. But we need some genuinely new thinking. We’re not getting it from our bullied, terrified Republican legislators. We’re not getting it from the grievance-ridden, let’s-help-the poor-by-giving-away-their-jobs-Democrats, either.
That’s why I turned to my friend, the Supreme Grand Poohbah, looking for some new thinking. In his next installment, he offers a way to make compound growth work for our nation rather than against it. The result can save Social Security for current and future generations. Over time, it will also eliminate the largest tax paid by most Americans, the employment tax.
Stay tuned.
Related columns:
Scott Burns, “What I’d Do to Save America,” 11/23/2019: https://scottburns.com/what-id-do-to-save-america/
Scott Burns, “The Supreme Grand Poohbah Returns,” 12/31/2023: https://scottburns.com/the-supreme-grand-poobah-returns/
Sources and References:
Billy Joel, Lyrics to “We didn’t start the fire”: https://www.google.com/search?client=safari&rls=en&q=lyrics+to+%22we+didn%27t+start+the+fire%22&ie=UTF-8&oe=UTF-8
Fall Out Boy update on YouTube: https://www.youtube.com/watch?v=2LkVKCWL0U4
Dimensional Fund Advisors website: https://www.dimensional.com/us-en/financial-professionals
Wikipedia: Shiller CAPE Index: https://en.wikipedia.org/wiki/Cyclically_adjusted_price-to-earnings_ratio
IslandBridge Capital, “The Nifty Fifty”: https://www.ib-capital.com/ib-articles-the-nifty-50/#:~:text=During%20the%20bear%20market%20of,stocks%20emerged%20as%20better%20performers.
Investment Returns data from NYU: https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
President’s Council of Economic Advisors, Economic Indicators – 3-month Treasury interest rates: https://www.govinfo.gov/content/pkg/ECONI-2025-01/pdf/ECONI-2025-01-Pg30.pdf
Karl Rove, “The Art of the 90-Day Tariff Pause,” Wall Street Journal, 4/9/2025: https://www.wsj.com/opinion/the-art-of-the-tariff-pause-can-trump-all-this-chaos-around-trade-deal-6de40f42?mod=Searchresults_pos1&page=1
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo: Scott Burns, October 2021, Flying the flag on Wind Song, cruising the Maryland Eastern shore
(c) Scott Burns, 2025