Why is the stock market resilient?

We investment advisers love to show fancy charts and graphs illustrating the historical track-record of the stock market’s resiliency. If you haven’t seen one in a while, check this out. It shows how markets spend way more time moving up than down. Sorry, couldn’t resist. 

I’ve been pondering during this latest bear market whether these charts really help investors remain disciplined during extreme bouts of negative volatility. Perhaps a spoonful of sugar would help us swallow the doses of intellectual medicine we prescribe for warding off the emotions of watching our investments decline?

I have a five-year-old son who often asks me, “Why, dad?” Like ten times a day!  Unfortunately, “Because I said so” never seems to cut it as the only answer. So, why do I believe markets are resilient, even against COVID-19? Earlier this month I answered that in an investment insight for the Vancouver Business Journal. Let’s expound on a couple of my reasons.  

Human Innovation

Andy Kessler wrote a piece in The Wall Street Journal a few weeks back titled, Innovate From Your Couch. In that article, he shares several examples of amazing innovations during challenging periods in history, including these:

“By now you may have read about how Isaac Newton, while sheltering in place during the 1665 closure of the University of Cambridge for the bubonic plague, used his free time to discover gravity and invent calculus. And how during the closing of London theaters due to plague in 1606, William Shakespeare had nothing better to do and wrote “King Lear” and “Macbeth.” Those guys didn’t even have Wi-Fi. You do, plus extra time. Be productive.

It will be interesting to reflect back in 2030 and reminisce on the new companies, products or services that were born out of the COVID-19 pandemic.  

Markets are resilient because they will capture the latest new discoveries, and use them to generate continued growth. Will you benefit from them too (by staying invested)?

Human Ingenuity 

Every day, we read stories about companies using their creativity to continue cultivating the vast resources on this planet that sustains and enriches humanity. Your local Costco or Walmart has rapidly implemented many new procedures to adapt. Auto manufacturers are making ventilators, while some distilleries are shifting production from spirits to hand sanitizer. You can’t put a price on our ability to adapt and use our creative talents to better serve others. 

Markets are resilient, because humankind is resilient. Why would you bet against that?

Bottom line, human innovation and ingenuity are powerful forces; we should not take them for granted. That is ultimately why I believe markets are resilient. While the coronavirus pandemic has caused major disruptions, global economies and capital markets are highly likely to prevail, and continue on. It probably won’t happen overnight, but watch them prove it to us again, delivering more fancy charts to appreciate in hindsight!  

Why else? Because I said so.