In the aftermath of the worst recession in decades, many are concerned about future growth in our economy. Consumer behavior has fundamentally changed. Deflation seems possible, unemployment is rising, housing has collapsed and banks are reluctant to lend.
Conventional wisdom says things are different now and so the recovery will be weak, if at all.
This is not dissimilar from the sentiment prevailing at the end of previous recessions.
In 1932, investors were melancholy about the future. The entire world was in depression, capitalism seemed like a failed experiment, unemployment was at 25%, and Nazi Germany was advancing. But the S&P rose 34.8% a year over the next five years.
And in 1949, U.S. budget deficit as a percentage of GDP was higher than it is today, communism was spreading, and the Soviet Union was threatening a nuclear annihilation. Stocks rose 23.2% a year for the next five years.
In 1982, with a long recession and unemployment at almost 10%, conventional wisdom was that an economic recovery is not a realistic probability. Prominent economists worried the recovery will be paltry. The scars of runaway inflation and the 1970's energy crisis, together with high interest rates, seemed to ensure a stagnant economy.
Yet 1982 proved to be a launch pad to a historic bull market in stocks. And over the next two years, the economy grew at more than 6% annually.
In the 20th century, with all its turbulence, violence and turmoil, U.S. stocks had a real (inflation adjusted) return of 6.9% a year, versus 1.5% for Treasury bonds. The Dow started the century at 66 and ended it at 11,400.
Of course the excesses from the housing boom of the last few years will have their toll, but history shows the worrywarts are often wrong. The psychological cycle is always the same. It starts with doubts about the sufficiency of the stimulus, then says the recovery is fake and the economy will soon stall or double dip, then that profits will not recover enough to justify stock prices. When the recovery proves enduring, it is feared to be unsustainable. We always end up being fine.
The business cycle is not dead. America has many coping mechanisms to deal with the current hangover. As it has before, this country will unleash the innovative, hard working and productive side of its citizens, and allow people to maximize their potential. Something that is now unknowable and unimaginable can boost GDP growth in the same way that previous inventions and technological breakthroughs did in the 1960's, 70's or '90s.
Meanwhile, the basic premise of investing is, buy low and sell high. And low is when nobody else wants it.
Alan Schram is the Managing Partner of Wellcap Partners, a Los Angeles based investment firm. Email at firstname.lastname@example.org