Three years ago this morning, I was on a D.C.-bound train with Jack Bogle, the pioneer investor, who I was profiling for this magazine. The then 79-year-old heart-transplant recipient had been recovering during a long stay in the hospital, where he annoyed his nurses by fuming at everything that had gone wrong with the financial sector and corporate governance. The Dow Jones industrial average was at half its 2007 highs, visiting levels it hadn’t seen since 1996—and 1966 if you accounted for inflation. Yes, 1966(!), when the average house cost $14,200 and gasoline—extra lead, please—went for 32 cents a gallon.
Back to spring 2009: The market seemed to tumble by triple digits every day. With $9 trillion in stock value having evaporated since 2007—family wealth dived the most since the Depression—investor sentiment was beaucoup putrid. Learned helplessness was rampant.
As our Acela stuttered its way into Union Station, Bogle confessed he had a feeling in his bones that was the inverse of what he had felt in the heady spring of 2000. That’s when the market was at such nosebleed, tech-fetish levels that he broke his long-held vow of passivity—”Don’t just do something, sit there!”—and dumped all his stocks for bonds. Now, with stocks pricing in fiery Armageddon, he thought it was time to go headlong into the market, so help him G-d. Hell, he thought, if the system were going down any more than it already had, we’d all be eating cat food anyway. The reward for taking just basic market risk, he argued, hadn’t looked so attractive in years.
Turns out Bogle called a generational low in the market (and to me, dammit, in person! Why, why didn’t I buy, buy?). Since March 9, 2009, the broad U.S. market, as measured by the Wilshire 5000 index, has surged 110 percent, with dividends reinvested. Emerging-market shares have returned 123 percent. The Russell 2000 index of small-capitalization companies has delivered a 146 percent return—snubbing its nose at those who argued that firms which did not have financing autonomy and tons of cash would be doomed. Apple (AAPL), the stock of our times, is up a sadistic 555 percent from where it was on that early spring day. Don’t say Henry Blodget 2.0 didn’t warn you.
Chances are you missed out anyway. History will show that Americans were substantially underinvested during this epic bull run. Equity fund flows have been in the dumps for four years now, a trend that accelerated last summer, when fears of a tzatziki-greased global economic contagion knocked stocks back down. But not for long; they recently hit highs not seen since 2008.
The economy and stock market need not, and often will not, move in lockstep. Three years ago unemployment was at 8.7 percent, vs. 5 percent in December 2007, the month the recession began. Joblessness would go on to spike into the double digits by October 2009. But in the intervening seven months, the Dow Jones gained 30 percent. And even as the economy has since hacked, coughed, and limped through a mostly jobless recovery, the Dow went on to return another 42 percent.
Last autumn, Vanguard, the index fund shop Bogle founded, published research on how a model portfolio divided equally between stocks and bonds fared in economic expansions and recessions since 1926. Its conclusion: “The average real returns of such a portfolio since 1926 have been statistically equivalent regardless of whether the U.S. economy was in or out of recession.”
Don’t just do something, right?
Back to the here and now. For all the bull run’s virility, and despite nine quarters of earnings growth, the U.S. stock market’s valuation remains 14 percent below its five-decade average. Its price-earnings ratio hasn’t been this low while the index was at a 52-week high in 23 years, according to data compiled by Bloomberg.
So if you missed out last time, take heart; you’re not alone. If history and human nature are any indicators, investors will dive back in, and with gusto, only after the market surges way past these levels.