No. of Recommendations: 4
What can I say? Read the paper from the Fed. I look forward to your refutation of their conclusions,I read the paper. It was an insult to the intelligence, and a complete waste of time. "The end of an era" is scare-mongering nonsense. It's the same scare-mongering we've heard from talking heads over the years which turned out to be utterly false.
What Smolyansky is saying is that the
entire 30-year period from 1990 to 2020 was a
lucky fluke for stock market investors because of low interest rates and low corporate tax rates. According to him, that era has just ended, interest rates and tax rates will rise, and your luck has just run out. Go sulk. Future market returns will be bleak and miserable.
The above conclusions are
ridiculous on their face, and easy to refute. First of all, if low taxes and interest rates were the catalyst for stocks to go higher during this "lucky" 30-year period, why did the market go down 49% during 2000-2002 and down 57% during 2008-2009? Did you feel lucky during these periods?
So Smolyansky's assertion that the 1990-2020 period was a "lucky" one due to low interest rates and taxes can be refuted by the "lost decade" of 2000-2009.
But it can also be refuted by the
great bull market of
1975-1985, an 11-year period which delivered a CAGR of almost
15%. During the latter part of the 1970s, the top corporate tax rate was as high as
70%! I kid you not. In the early 80s, the tax rates came down to 46%, still high. To add insult to injury, interest rates went straight up from 7.5% in 1975 to a peak of 15% in 1981. It wasn't until Reagan's Tax Reform Act of 1986 that corporate taxes were lowered to 28%.
According to Smolyansky, the double whammy of 70% corporate tax rates and 10+% interest rates should have delivered a knockout punch to the stock market. But that didn't happen. Investors during that 1975-1985 period enjoyed annualized returns of 15%, which is 5% above the long term average.
So there you go. I've made 2 points, with data, to refute the contents of the paper. The guy who wrote the paper is an economist at the Fed. Economists at the Fed can't even predict that inflation is not "transitory", what makes you think they can predict the stock market?
What you should do insteadIf you are in your wealth building years, and have a job with a 401K, set aside 6 months of emergency living expenses, and any large expenses (like college or a new car) that you expect to incur in less than 3 years in cash. Then set up automatic transfers of 10% of your paycheck into an index fund in your 401K plan. Don't get cute and try to time the market, and for God's sake don't listen to fear mongerers.
For me, the scariest time was during the banking crisis of 2008, with banks like Lehman, WaMu and Countrywide failing all over the place. But I still kept dollar cost averaging into my 401K and focused on my career rather than the market. This is called
time diversification. I look back on those contributions now and marvel at cheap I bought the shares at.
To succeed in the market and achieve your retirement goals, you don't need to be a finance whiz or a math genius. You just need to keep your head while others are losing theirs.
Cheers,
Mechinv
Paper referenced:
https://www.federalreserve.gov/econres/michael-smo...
