BACK • 
In Defense of Optimism
A couple of Saturdays ago on our weekly "Taking Care of Business" call-in radio show, a listener said, "Tom, you're always optimistic. How do you keep it up in these markets?"
As I answered the question, I thought I should talk about it in this space now, because there is a case for optimism virtually all the time. I told our listener that everybody is now reacting to the last, barely, 12 months. How quickly we forget, while these 12 months have admittedly been tough, that the last year was preceded by five winning years in a row! The average over the last six years, including last year's losses, still leaves the Dow Industrials with a gain of 19.53%, the S&P 500 up 20.25%, the NASDAQ Composite up 28.36%, and the small cap Russell 2000 up 12.25%. It should also be remembered that 1994 was a mixed year, while 1993, 1992 and 1991 were winners. You'd have to go all the way back to 1990 for the last clear-cut losing year in the market apart from last year.
The point I'm trying to make is that 5 of the last 6 years were up. We've also had, over the last 11 years, eight up years, two down years, and one mixed. Those are pretty good odds, and if I could replicate the same record over the next 6 or 11 years, I would be happy to do it.
There are numerous other reasons for optimism; some have already been recounted in this space, but since everyone is so down in the dumps right now, a quick review wouldn't be out of order. Since 1945, the average rate of return in a year following a down year has been, for the S&P 500, 16.7%, and for the NASDAQ, 22.4%. Those figures get even more impressive if the down year is followed by a year in which the Fed is cutting interest rates, which they are currently doing. Then, the S&P 500 has averaged 24.4% in the next 12 months, while the NASDAQ has gained, on average, 35.3%. The interesting point here to me is that we're right back to that old saying, "Don't fight the Fed." It is the pessimists and the gloom and doomers of the world who are fighting the Fed, just as it begins to cut rates. And if history be our guide, they will be wrong again as usual.
I still honestly, deeply and personally feel that this year will be a better year than most people expect. The combination of the aforementioned rate cuts, and the upcoming tax cut has historically been powerful medicine for an ailing stock market, and I cannot come up with a reason why it shouldn't be this time as well.
I know you're hearing all this talk now about a recession, but I don't believe we're in one. In fact, you can't be in a recession until you have two consecutive quarters of negative Gross Domestic Product. That is the pure definition. So, nobody will be able to say for sure whether we are really in a recession until late June or July when the figures for not only the first quarter but the second quarter are revealed. To be sure, there are segments of our economy that are in recession right now, most notably the manufacturing section, but manufacturing only represents about 15% to 20% of our economy today. While it is too bad for the manufacturing sector, it does not mean that the entire economy is in recession. People are using words carelessly these days, sometimes with the definite intent of trying to scare you-don't let them do that.
I will concede that we were all too optimistic a year ago, but at present I think we run the risk of compounding the error by being too pessimistic. The bottom line; the gloom and doomers who are selling their tale of woe right now are betting against the long-term economic vitality of our country-- which I think is a bad bet. We still are the economic wonder of the world, the leader in technology and productivity, and there's no one even near us to present a decent challenge. So, yes, I'm optimistic, yes, I was optimistic last year, and sometimes the optimism isn't justified, but by almost any long-term measure, optimism is the right point of view and the optimists in general have been so right for so long, to me, it is hard to be anything else.
(Tom Butenhoff is a First Vice President with J. E. Liss and Company, Inc.
in Milwaukee. The views are his, and not necessarily those of Liss
Financial Services or the Job Connection/Hiring
Network.)