Can History Predict Our Future?

Businessman Consulting Glowing Crystal BallIf you’re a regular listener of our radio show every Thursday you’ve heard us mention a common theme a handful of times. “A Headline Driven Year” is what we keep saying. As I began writing this week’s commentary I wanted to convey the sense to our loyal readers that despite these mostly negative headlines all hope is certainly not lost. In fact, we’re still pretty optimistic about 2014. I only point out these headlines because, as a history buff, I firmly believe that history repeats itself. Look at some of the more popular headlines: Russians invading its neighbors, continued violence in the Middle East, a lack of confidence in our leaders in Washington, mounting national debt, lingering unemployment, an inspiring new Pope, North Korea and, well, whatever crazy thing North Korea is doing this week. These aren’t headlines from this year; these are headlines that Billy Joel sang about in his hit from 1989, “We Didn’t Start the Fire.”1 We’ve all tried to mumble through the lyrics at least once, but if not, go ahead and google it or better yet, rock out to it.

History repeats itself, but it may also serve to predict our future as well. As just one example, let’s look at our history with Russia. After a difficult decade for the economy and a long, unpopular war in Vietnam, America wanted nothing to do with fighting Russians in Afghanistan in 1979.2 After the 2008 financial crisis and two costly wars, there is little motivation for the U.S. to escalate the situation with Russia and Ukraine. As we continue our road to economic recovery, is the nation ready to take on the role of the World’s Police Officer yet again and risk losing all that we’ve gained since 2008?

Geopolitical events do shape our economy, specifically our international and emerging market investments. I’m sure 98% of Americans couldn’t find countries like Ukraine or Venezuela on a map, but when we look at emerging markets, these are exactly the types of countries that are profiled. Regionally important countries with a very valuable commodity (oil in both cases) with the potential for a flourishing market…if only they could get their infrastructure and government under control. If Ukraine can stabilize itself, it can be a major oil exporter for Europe; much like Venezuela can for South America. If not, it creates even larger-scale instability and negatively affects neighboring economies, thus affecting your emerging market investments. In short, emerging markets can be volatile, and one that we are not yet comfortable with for our clients.3

At this point you may be saying to yourself: Chris, this history lesson really is fascinating and I’d love to learn more, but why am I reading about geopolitical events on a financial advice newsletter? Again, history repeats itself. After Russia invaded Afghanistan in 1979, the American economy enjoyed about seven more years of a strong gains until the market crash in 1987. 4 After September 11, 2001, America enjoyed a booming housing market that drove the economy for seven years until, guess what? The bottom fell out in 2008. Am I predicting that we have another war on the horizon and seven more years in this Bull Market with a definite crash around 2021? Absolutely not, but I don’t think the end is near just yet. The longest Bull Market run ever was from December 1987 through March 2000, returning 582% over that period.5

So keep watching the headlines, but don’t be alarmed. These headlines may continue to drive the market through 2014 for short periods of time, and we are watching closely for any short term effects they may have on our client portfolios. But we will always keep one eye looking down the road as current events become history, and thus, we believe could help predict our future.

(1) “We Didn’t Start the Fire.” Billy Joel. 1989. http://en.wikipedia.org/wiki/We_Didn't_Start_the_Fire (2) “Soviet Invasion of Afghanistan.” Editors of Encyclopedia Britannica. 12/25/2013. http://www.britannica.com/EBchecked/topic/1499983/Soviet-invasion-of-Afghanistan (3) “Emerging Market Economy.” Investopedia. http://www.investopedia.com/terms/e/emergingmarketeconomy.asp (4) “A Brief History of the 1987 Stock Market Crash with a Discussion of the Federal Reserve Responsse.” Mark Carlson 2007 – 13. http://www.federalreserve.gov/pubs/feds/2007/200713/200713pap.pdf (5) “Will the U.S. bull market continue?” Reuters. John Wasik. 1/6/2014. http://uk.reuters.com/article/2014/01/06/column-wasik-idUKL2N0KG13P20140106
• The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All past performance references is historical and is no guarantee of future results. All indicies are unmanaged and may not be invested into directly. International and emerging market investing involves special risks such as currency fluctuation and potential instability and may not be suitable for all investors.