Equities can't rise when the world is so scary - Fisher's financial mythbusters

Often, media and pundits tell us things are just 'too scary'; the world has always faced risks. Investors may say: 'Yes, but that was then, and I always knew those past scary times would work out OK. But this time it's different.'

Investors always think this time it's different, but it's never as very different as they fear. That's why Sir John Templeton famously said: 'The four most expensive words in the English language are "this time, it's different".'

Among the jumble of evolutionary responses that helped humanity long ago but make investing tougher now, humans evolved to forget past pain, fast. It was a survival instinct!

Think we've had a rough few years recently? A major migrant crisis in Europe; heightened tensions in the Middle East, Russia and Turkey; contentious politics with Brexit and the election of Donald Trump in the US. The list goes on. But are politics truly more contentious now?


Tensions have been flaring in the Middle East not just since Israel became a nation, but for all its history (in 1801, the US Marines were dispatched to what's now Libya to protect shipping lines from terrorists - the Barbary pirates). The world has been plagued by geopolitical conflict since the dawn of civilisation.

Some folks like to claim even the weather is getting more severe and unpredictable for whatever reason, making hurricanes more fierce, for example.

But that doesn't explain why the 1900 Galveston hurricane was the deadliest to ever make landfall on the US - and the third costliest based on inflation-adjusted dollars. Of the top 10 strongest US land-falling hurricanes, all but two were prior to 1970.

Why does that matter? Simply, folks inflate current events in their mind and misremember past events. Think geopolitics are tense now? What about during the Cold War? Or the Cuban Missile Crisis, when missiles were actually aimed at the US from Cuba?

Think debt is high now? From 1750 to 1850 Britain's net public debt averaged 156 per cent, peaking above 250 per cent in the early 1820s. Yet Britain was the world's dominant economic and military power during that time.

Remember Chernobyl? That accident put Japan's much better contained one in 2011 to shame. We've had oil shocks, strikes, recessions, riots, hyperinflation, deflation, accounting scandals, impeachments and home-grown terror attacks on European soil.

Yet if we look at the notable events for each year back to 1935 and annual global equity returns for each year, we see that equities have overall risen.

Take, for example, 1992, when Hurricane Andrew devastated Florida, race riots followed the LAPD acquittals, and there were recession fears and bitter US elections: the MSCI World index* rose by 17 per cent.

Even in 1941 - Pearl Harbor; Germany invasion of the USSR, US declaration of war on Japan, Italy and Germany - stocks worldwide rose 16 per cent.


Yes bear markets occur, but no global bear market has ever been predicated by a natural disaster.

Outside of the start of World War II in Europe, geopolitical tensions, even outright major terror attacks and the start of hot wars, have had a fleeting and not necessarily negative impact on markets.

History is never pristine. The world can be a pretty darn scary place - there's never a dull moment. Yet, through it all, one constant is the resiliency of capital markets. If you're waiting for things to 'calm down' before investing, you'll be waiting a long time indeed.

And if you didn't invest during periods of turmoil, you wouldn't spend much time invested at all - a mistake, since UK equities have been up 75 per cent of all years.

How can equities rise in the face of all this drama and trauma? Scary things are a constant in the world; those that are well-known are quickly priced into the market. Their presence is just as often good, not bad, for equities.

Then, too, remember that in the near term, equities can wildly wiggle. But over time, their upward sweep represents the potentially infinite upward sweep of profits. The profit motive is an intensely powerful positive force.

Profit motive isn't sapped because humanity faces challenges. In fact, challenges and the need for innovation can be motivating factors for those willing to take risks to chase future profits.

Capital markets are resilient because humanity is resilient. Those who have bet against that have been proven wrong, time and again.

Ken Fisher is founder and chairman of Fisher Investments.

*The (MSCI) World index measures the performance of selected stocks in 23 developed countries and is presented net of dividends and withholding taxes. Returns prior to 1970 are provided by Global Financial Data's World Return Index, which simulates how a world index would have performed had it been calculated back to 1926.

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