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How Likely Are Market Crashes?

It is well known that equities are subject to both booms and busts, testing the discipline of most investors and leading legendary investor Warren Buffett to conclude: “Investing is simple, but not easy.” Perhaps the best example of the boom-and-bust nature of equity markets is the late 1990s. From January 1995 through February 2000, the S&P 500 boomed, returning 25.8% per year. By the end of the period, the ShillerCAPE 10 had reached 42.2, producing an earnings yield of just 2.4%. The CAPE 10 earnings yield has been as good a predictor as we have of future equity returns. At the time, the yield on 10-year Treasury Inflation-Protected Securities was in excess of 4%. In other words, the expected real return to equities was almost 2 percentage points less than the riskless real return on TIPS. If anything is a sign of a bubble, that is the leading candidate. Then, from March 2000 through September 2002, the S&P 500“busted,” producing a cumulative loss of 38.3%.

Another boom and bust was experienced from October 2002 through October 2007 when the S&P 500 returned 15.5% per year. That boom, which pushed the CAPE 10 to 27.3, producing an earnings yield of 3.6% (just 1.5 percentage points above that of the yield on 10-year TIPS), ended in a bust that saw the S&P 500 lose a total of 51.0% from November 2007 through February 2009.

The next boom and bust occurred a decade later. After returning 26.1% a year from 2019 through 2021, producing a total return of just over 100% in three years—a boom that pushed the CAPE 10 to 38.3 (an earnings yield of just 2.6%)—from January through September 2022, the S&P 500 lost 23.9%.

The historical data demonstrates that extremes in the right tail of the return distribution (caused by rising valuations) can portend sharp reversals and painful performance downturns.

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Aging Population Affects Economic Growth but Not Stock Returns

While it’s true that population growth and productivity determine the rate of growth in a country’s economy, the conventional wisdom that faster-growing economies lead to higher investment returns isn’t true. The wrong conclusion is reached because it fails to account for the fact that markets are highly efficient in building information about future prospects into current prices. There are also other explanations.

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What Happens to the Market if America Goes to War?

The stock market hates uncertainty, and there is plenty of uncertainty with respect to the conflict between Russia and Ukraine.

This post focused on violence in the Middle East, specifically Syria, and the potential that the United States could enter the conflict and what that might mean for the markets. Given the recent turmoil in Eastern Europe and the developing international crisis, we are responding to requests from Enterprising Investor readers to provide an update.

So, is now the time to beat a hasty retreat from stocks?

Let’s examine how capital markets have performed during times of war.

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Largest Bankruptcies in the United States

As of July 2023, the largest all-time bankruptcy in the United States remained Lehman Brothers. The New York-based investment bank had assets worth $691 billion U.S. dollars when filing for bankruptcy on September 15, 2008. This event was one of the major points in the timeline of the Great Recession, as it was the first time a bank of its size had failed and had a domino effect on the global banking sector as well as wiping almost five percent of the S&P 500 in one day.

In March 2023, for the first time since 2021, two banks collapsed in the United States. Both bank failures made the list of largest bankruptcies in terms of total assets lost: The failure of Silicon Valley Bank amounted to roughly $209 billion U.S. dollars worth of assets lost, while Signature Bank had approximately $110.4 billion U.S. dollars when it collapsed. These failures mark the second the third largest bank failures in U.S. since 2001.

The collapse of Silicon Valley Bank and Signature Bank painted an alarming picture of the U.S. banking industry. In reality, however, the state of the industry was much better in 2022 than in earlier periods of economic downturns. The share of unprofitable banks, for instance, was 3.4 percent in 2022, which was an increase compared to 2021, but remained well below the share of unprofitable banks in 2020, let alone during the global financial crisis in 2008. The share of unprofitable banks in the U.S. peaked in 2009, when almost 30 percent of all FDIC-insured commercial banks and savings institutions were unprofitable.

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The People’s Republic of China - 70 Years of Economic History

From agrarian economy to global superpower in half a century—China’s transformation has been an economic success story unlike any other.

Today, China is the world’s second-largest economy, making up 16% of $86 trillion global GDP in nominal terms. If you adjust numbers for purchasing power parity (PPP), the Chinese economy has already been the world’s largest since 2014.

The upward trajectory over the last 70 years has been filled with watershed moments, strategic directives, and shocking tragedies — and all of this can be traced back to the founding of the People’s Republic of China (PRC) on October 1st, 1949.

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