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Note from the CIO: Why We Expect Equities to Rise

Post Series: Investment Committee Commentary Q3 2018

Last October, while fellow Investment Committee member David DeWolf[1] and I were attending a conference, David asked the speaker a very interesting and rather philosophical question, “Why should equities always go up?” We were both unsatisfied with the speaker’s answer (which was mostly a non-answer), and the question continued to gnaw at me.

It is not that stocks always go up. There are periods when stocks temporarily go down, sometimes to a severe extent such as in 2008. In fact, since 1980, the average annual decline in the S&P 500 has been about 14%, and since World War II, there have been 13 bear markets with an average drop of 33%!

Periods exist during which stocks appreciate but not to the level of our expectations. For example, in the first half of 2018, the S&P 500 stock index was up only 2.7%. During the same period, drops in international markets were a drag on the performance of the Abacus 100% equity portfolio which returned only 0.2% (before fees).

Apart from these dips, however, the overall stock market has risen remarkably over the decades. From 1976 through 2017, the 100% equity Abacus Rainbow simulated portfolio earned an average of 14.0% annually (before fees). This is 10.4% above inflation over the same period, 9.4% above one-month U.S. Treasury Bills (considered the “risk-free” investment), and 6.6% above the total U.S. bond market.[2] Our expectation going forward for our 100% equity portfolio is 7.0% over inflation (before fees), which is no small thing. So, what is it that makes us expect stocks to continue rising?

I happen to have spent most of the first half of 2018 reading Enlightenment Now: The Case for Reason, Science, Humanism, and Progress, by Steven Pinker, Harvard Professor of Psychology. Professor Pinker’s thesis, which is extremely rigorous and extensively documented, is that human life since the Enlightenment has improved at an astonishing rate and continues to do so. He charts life expectancy, health, wealth, the environment, literacy, sustenance, peace, equal rights, and many other measures to demonstrate the extent and the speed of accumulating progress.


That headline could have been run by any news outlet every day for the last 25 years. The rate of extreme poverty around the world plummeted by about 50% in less than three decades and now stands at less than 10%. Worldwide life expectancies have risen from 30 years of age to 71 since the Enlightenment unfolded in the late 18th century. The current child mortality rate in Africa is lower than what it was in Europe in 1950. Since 1990, nearly 300,000 people per day worldwide are being plugged into the electrical grid.  Increasingly, people have universal access to fresh water, and we have enough food and the distribution systems to get the food to everyone (we only have political obstacles). The number of children going to school has increased. More than 90% of people on the planet under the age of 25 are now literate. We now have more leisure time. There are more forests in the northern hemisphere now than there were 100 years ago. We are safer. War and crime have dramatically reduced. Today’s nuclear weapon stock is only 15% of its 1967 peak. People are getting healthier, richer, and safer and also freer. At the turn of the 20th century, women could vote in just one country; today with one exception they can vote in every country where men can vote. Americans work 22 fewer hours a week than they did in the past. Life has been getting better by measure after measure.

Below are a few of the most powerful charts in the book:

Extreme Poverty, 1820 – 2015

GDP per capita, 1600– 2015

Life expectancy, 1771 – 2015

This is not to appear “Pollyannaish.” One could certainly tell a different, more pessimistic story by including the following: there are still 700 million people living in extreme poverty, the lower middle classes of the developed world have seen their income rise by less than ten percent in two decades, millions die of preventable diseases, almost a third of humanity is oppressed in autocratic states, many people lack basic education, 38 billion tons of CO2 annually emitted into the atmosphere threaten to raise global temperatures (which is why Abacus invests in companies that emit 80% less CO2 than the market as a whole), and the world has more than 10,000 nuclear weapons.

The message I take away from the book is the answer to David’s question about equities. “Among the brainchildren of the Enlightenment is the realization that wealth is created. It is created primarily by knowledge and cooperation: networks of people arrange matter into improbable but useful configurations and combine the fruits of their ingenuity and labor. The corollary, just as radical, is that we can figure out how to make more of it.” The purpose of studying progress is not self-congratulation but identifying the causes, so we can do more of what works. Market economies solve the vastly complex problem of coordinating the efforts of hundreds of millions of people by using prices to propagate information about need and availability. This is the world we live in.  By allowing the everyday citizen of the world easy ownership of over ten thousand companies, the global equity market is the only investment that captures the great forces of reason, science, and human ingenuity. There is no limit to what we will conceive and create, because there is no limit to human desires and imagination. That is why equities go up.

[1] David DeWolf is also a partner and the Chief Financial Officer at Abacus, and for the history buffs he was my original partner and co-founder of Quantum Wealth Management, which we merged with Abacus on 1/1/2012.

[2] This 42-year period was chosen because 1976 is when the total bond market index began.

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