Why do Stocks Climb a Wall of Worry?

Why do Stocks Climb a Wall of Worry?

| September 18, 2020
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Every year feels the same when invested in the stock market. You get lulled to sleep as the market ebbs and flows but gradually goes up over the months. It is easy to forget the level of uncertainty and risk that lay dormant when things are going somewhat smoothly in the world. When unexpected things happen in the world, it reminds people of the uncertainty of the future, rendering them myopically focused on day to day moves in the market. It is this uncertainty about the future that makes investing so nerve-wrecking for people. Historically, the market has a financial panic of differing degrees every 10 years. This decade, it was COVID-19, last decade, the Great financial crisis, before that you had the DotCom Bubble and 9/11. This goes on and on through history going all the way back to the Great Depression. In America’s agricultural days, there was a financial panic every couple years as a result of droughts and floods.


However, remarkably, if you look at the wealth created in stocks as measured by the S&P 500 index from 1929, to 2020, it increased by a factor over 1,000 after adjusting for inflation! (https://www.officialdata.org/us/stocks/s-p-500/1929). Along the way, the market was negative about 46% of the days, so almost half of the time, people see their money going down! What matters in the long-run and the reason Warren Buffett always remains so optimistic on future market returns is because of the system and dynamism that comprises American enterprise. As long as that system prevails, the future for American businesses is bright. Just look today, during a horrible crisis, people and businesses have adjusted their behavior and practices to make ends meet and even thrive in some situations. During COVID, Elon Musk’s Space X launched the first ever commercial rocket ship into and space and landed safely. The prospect of taking vacations in outer space is now an actual possibility for foreseeable generations. How exciting is that? Most vaccine’s take 4-5 years until they are operable, even in a good case scenario. Now, it is conceivable that within 12 months of COVID’s outbreak, there could be a vaccine. Even the possibility of being able to work remotely is an incredible accomplishment that 10 years ago would not have been possible for most companies.


There is of course immense suffering happening in the world and people are losing loved ones as well as their jobs. The horror of those loved one’s losses, personal or monetary, is spurring global action and coordination like the World has never seen. Periods of great stress and suffering also bring about great progress. World War II resulted in the baby boomer generation and greatest increase in GDP growth rate that our country has ever seen. We went from a mobile telephone, to a computer in our hand that was more powerful than a computer the size of a small swimming pool. The progress throughout history is undeniable, and it has been driven by technology. Technology is not always used for good, and there of course are unintended consequences. But I believe it has been good in aggregate for the world. People will gradually be retrained in new skills that are relevant in today’s digital economy.


There will always be worry because life and global affairs are uncertain. Humans evolved to fear uncertainty as it potentially threatened our survival. It is largely a beneficial emotion. However, when it comes to investing, human psychology is a detriment to success. It is more challenging and unnatural to put a current event into historical context than it is to react to the state of the world at a particular point in time. The market will usually go down when there is worry in the world. However, underneath that surface level activity, there is a foundation that is dynamic, and its survival is dependent on growth, and growth is what it is best at.

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