THE DEATH OF EQUITIES REDUXHOPE IS NOT A STRATEGY. NEITHER IS FEAR.

INVESTMENT STRATEGY GROUP

Spring 2020

THE DEATH OF EQUITIES REDUX

I N V E S T M E N T S T R AT E G Y G R O U P

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GREGORY M. DRAHUSCHAKEquity Market Strategist

Greg Drahuschak is a Market Strategist and provides frequent commentary with particular focus on the equity market. He joined Janney in 1991 and has more than 45 years of economic experience.

Greg has written articles for several newspapers and websites, and has been the visiting expert on many live radio broadcasts. He earned his B.A. in fine arts from Indiana University of Pennsylvania, as well as certificates from the Wharton School of the University of Pennsylvania and from the New York Institute of Finance.

The title of this report was borrowed from the infamous August 13, 1979, Business Week cover story that focused on burgeoning inflation, an institutional exodus from the stock market, a 700% rise in the price of gold, and rapidly rising interest rates. These items and others cited in the magazine article declared that the stock market’s role in creating wealth was over. As one economist then stated: “We have entered a new financial age. The old rules no longer apply.”

However, one, two and 10 years from publication of the Business Week article, the S&P 500 was up 14.76%, 24.29%, and 219.36%, respectively.

MARKETS RECOVER FROM CRISES

During the 30 events in our focus, five years afterwards the S&P 500 was down only five times and after 10 years, was lower only once.

At the December 31, 2019, close, the S&P 500 was 58.93 times higher than it was when this study began May 28, 1962. This is a compounded annual growth rate of 7.01%. Including dividends, the annual total return for the past 60 years is 10.12%.

The economy either was on the cusp of a recession or already in one in three of the instances of losses five years after an event. The other two came at the end of what commonly has been called the “dot-com bubble.”

Some of these 30 events elicited much stronger reactions than others. The nation was riveted on November 22, 1963, after the assassination of President John F. Kennedy that virtually brought commerce to a halt for several days. Five years later, the S&P 500 was 98.73% higher.

Hope is not a strategy. Neither is fear.

Events over many years have arisen that appeared to threaten what had been an inexorable rise in the U.S. stock market. Selling stocks on fear of these events typically proved to be a major mistake.

Through the last century, the equity market faced more than 100 events of varying severity that held the potential to derail stocks. This report focuses on 30 of these consequential events.

Chart 1: S&P 500 – January 1, 1969 to February 25, 2020

(Source: Thomson Financial; Janney Investment Strategy Group)

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S&P 500 - January 1, 1969 to February 25, 2020

Perhaps no event was more shocking than the 9-11 attack on the World Trade Center and the Pentagon. Five years later, the S&P 500 was 18.89% higher. Not even the largest one-day percentage drop in history was enough to prompt lasting market damage. For reasons that today are still not completely understood, the stock market fell 22.6% on October 19, 1987. Ten years later, it was up 189.73%.

HEALTH OUTBREAKS HAVE NOT HAD LASTING IMPACTS

Market reactions to previous health scares are not included in our summary of previous market events. The following specifically focuses on the market reaction to the current coronavirus (COVID-19) and what happened after similar events.

The coronavirus along with several other factors took a heavy short-term toll on the market. At its thus far 2020 peak of 3393.52, the S&P 500 on February 19 was 5.04% above its 2019 close. By March 12, the S&P 500 was down 26.3% from its intraday all-time high and down 22.6% from where it ended last year. This was the fastest decline of 20% or greater from a record high in the history of the S&P

500. The severe acute respiratory syndrome (SARS) virus in 2003, H1N1 in 2009, Middle East Respiratory Syndrome (MERS) in 2014, Ebola in 2014, and ZIKA in 2016, all weighed on the market for a time. Following the first cases of each virus in the United States, however, the S&P 500 on average was up 8.7% and 10% in the first 60 and 90 days. A long-term look is even more important.

As the chart below illustrates, one, five, and 10 years after three of the prior health scares, the S&P 500 was notably higher. One year following the Ebola scare, the S&P 500 was down 2.65%, but two years after the event it was up 9.94%.

The speed and severity of the recent market decline from its high is unlikely to be recovered as rapidly as the decline unfolded, as effects on global commerce from the virus outbreak likely will linger for a time.

History, however, strongly indicates that the passage of time and the size and diversity of the U.S. economy eventually allow the market to recover and continue on what has been its inexorable long-term rise. We expect the same pattern to be true as the market works through another event that threatens it.

Chart 2: Health Scares and the Market Percentage Change Afterwards

(Source: Thomson Financial; Janney Investment Strategy Group)

21.94

43.34

12.40

(2.65)

19.85

59.20

129.23

56.59 50.93

60.88

243.84

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65.00

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155.00

165.00

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185.00

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245.00

Sars 1/2/2003 H1N1 3/25/2009 MERS 5/2/2014 Ebola 9/30/2014 ZIKA 2/2/2016

Health Scares and the Market Percentage Change Afterwards

1 year later 5 years later 10 years later

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For reference, the chart below illustrates the 30 prior major events that incorrectly appeared to be major long-term problems.

Disclaimer: Past performance is no guarantee of future performance and future returns are not guaranteed. There are risks associated with investing in stocks such as a loss of original capital or a decrease in the value of your investment.

This report is provided for informational purposes only and shall in no event be construed as an offer to sell or a solicitation of an offer to buy any securities. The information described herein is taken from sources which we believe to be reliable, but the accuracy and completeness of such information is not guaranteed by us. The opinions expressed herein may be given only such weight as opinions warrant. This Firm, its officers, directors, employees, or members of their families may have positions in the securities mentioned and may make purchases or sales of such securities from time to time in the open market or otherwise and may sell to or buy from customers such securities on a principal basis.

Chart 3: Major Market Events – Percentage Change Five and 10 Years Later

* Results are through 2.25.2020 (Source: Thomson Financial; Janney Investment Strategy Group)

(30.00)(10.00)10.0030.0050.0070.0090.00

110.00130.00150.00170.00190.00210.00230.00250.00270.00290.00310.00330.00

5-year Change 10-year change

Chart 4: Percentages By Event

* Results are through 2.25.2020(Source: Thomson Financial; Janney Investment Strategy Group)

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5–YEAR CHANGE

10–YEAR CHANGE

Cuban missle crisis 63.93 98.83

Kennedy assassination 98.73 85.90

Brazilian Markets Crash of 1971 4.51 30.06

Ol shock and recession (20.15) 16.15

Nixon Resignation 30.46 104.72

Business Week cover 44.63 229.33

Kuwait market crash 192.40 290.06

Black Monday 1987 27.74 189.73

Brazil market Crash 41.78 301.98

Failed UAL takeover 34.65 274.73

Early 1990s recession 51.51 308.73

Japanese asset price bubble 88.68 293.10

Black Wednesday 125.59 112.21

1997 Asian financial crisis 7.15 68.07

October 27, 1997, mini-crash 2.36 75.71

Long-Term Captial collapse (8.31) 18.34

5–YEAR CHANGE

10–YEAR CHANGE

Dot-com bubble (13.48) (17.88)

September 11 attacks 18.89 6.38

Stock market downturn of 2002 99.88 85.58

Chinese stock bubble of 2007 (2.38) 69.38

United States bear market of 2007–09 (7.84) 64.39

Financial crisis of 2007–08 39.09 138.04

2009 Dubai debt standstill 89.91 188.93

European sovereign debt crisis 78.90 164.27

2010 Flash Crash 80.17 169.74

August 2011 stock markets fall 68.90 143.07

2015–16 Chinese stock market crash 49.38 49.38

Brexit low 53.54 53.54

* 12/24/2018 sell off 33.05 33.05

2020 Coronavirus Crash ? ?