We Win in The End

Tomorrow marks an important anniversary...

On that day 83 years ago, the Japanese navy attacked the U.S. naval base at Pearl Harbor, Hawaii, inflicting terrible damage to our military forces and killing more than 2,400 U.S. personnel.

For my generation, World War II still loomed large. My parents were born right around the time of the war, and my grandfather served during the D-Day landing. When I was growing up, movies and TV shows revolved around the war.

So, while it ended 27 years before I was born, its memories surrounded me.

To this day, the scratchy recording of then-President Franklin Delano Roosevelt's speech opening with "Yesterday, December 7, 1941 – a date which will live in infamy..." comes to my mind every Pearl Harbor Day.

Spending the last half decade in the newsletter business has given me a new appreciation for the role of history in my investment strategy.

When running an investment fund, you spend most of your time focused on the next earnings call or meeting and putting out short-term "fires." You have much less time to look at the big picture – especially across 100 years of history.

Given how the attack on Pearl Harbor propelled the U.S. into the deadliest conflict in human history, it's worth taking a look at the performance of the stock market around that period.

The market was closed on the day of the attack (a Sunday), but the Dow Jones Industrial Average fell more than -3% the next day and would fall another -10% by early 1942.

But take a look at what happened next ...

One would probably expect that global economic devastation and loss of life, along with the removal of a considerable portion of the prime working population, would have massive, adverse effects on the economy and stock market, but the opposite happened.

And looking further back, we can see a similar occurrence after the U.S. entry into World War I...

Of course, both of these dramatic events involved plenty of other variables in regard to stock market performance, and the world was also a very different place from now.

In the last five years, we witnessed the single most disruptive event since World War II - the COVID-19 pandemic.

We've experienced conflicts, recessions, natural disasters, and other terrible events since that war ended, but there has been nothing that affected the entire planet as much as this crisis. While it lacked the magnitude of the human devastation of World War II (although still terrible), perhaps COVID-19 had an even broader effect across the globe.

And yet again, in the face of an unmitigated disaster, we saw the stock market rebound and move to new highs after the collapse in early 2020.

Looking back at the World Wars, it would be difficult to point to some of the same factors that observers credit for the 2020 rally – such as the unprecedented injections of monetary liquidity globally – but we can still see some economic similarities.

In both cases, healthy economies were disrupted by closures and saw the repurposing of productive capacity. In some ways, the upheaval made certain parts of the economy work even harder while eliminating some weaker businesses.

Of course, COVID-19 was different in that many businesses that would have otherwise been just fine have gone under.

On the other hand, we've also seen businesses that were already struggling and didn't have a good market position or balance sheet... or other companies that were on the back end of their technological curves.

What emerged from the chaos of the war, though, wasn't only a streamlined economy but the emergence of radical new technologies that would completely transform life as we knew it then. Think of air travel, nuclear energy, and computers.

Now, we have seen the emergence of artificial intelligence in the wake of the 2020 collapse!

When looking at the historically "surprising" performance of the global stock markets in the context of the economic disruption, it can begin to make a lot more sense.

It's easy to get lost in the "moment" of the news flow – especially if it's overwhelmingly negative. However, looking at the larger context of what can happen in the economy and markets is essential for an investor.

Remember our firmly held long-term view at HX Research that as humans, Americans, and stock investors – in the end, we win!