A Tale of the Twenties: The Roaring 1920s and the Boomerang 2020s

by Tony Genua, Senior Vice-President and Portfolio Manager, AGF Investments Inc.

Historically, investing in stocks after a 20% decline has tended to yield good outcomes for investors.

Three years ago, we contributed to the AGF Outlook by looking at the decade ahead, and in that piece we discussed the many innovations that would impact the global economy in the future. Little did we know that around the corner there would be a global pandemic that would not only accelerate many of those trends, but also introduce other market forces, such as inflation and deglobalization.

The first years of the 2020s have seen some tumultuous events, to be sure, but many have a common aspect: they signal a return to previously existing conditions. Indeed, the 2020s remind us of a boomerang, returning some conditions of what we might have thought were in the distant past, but are now influencing the investment landscape.

If we look for precedents, we might turn to the 1920s, an era that also saw a meaningful transition – albeit one that did not end so well. The decade earned its nickname – the Roaring Twenties – by being a time of dramatic change and growth. The stock market boomed, and Western society enjoyed unmatched prosperity and cultural advancement. This included:

• Real GDP growth averaging 4.2%;

• The Dow Jones Industrial Average rising 600% between 1921 to 1929;

• A material reduction in taxes, with the top U.S. rate dropping from 73% to 24%;

• Car, household appliance and home ownership becoming widespread;

• The beginning of commercial aviation; and

• Credit exploding with margin debt and consumer instalment payments.

There were other breakthroughs, too. After a difficult start to the decade, farmland productivity and incomes rose sharply. Communications improved with the move from the telegraph to the telephone. Women finally earned the right to vote. The discovery of penicillin improved life expectancy. Pre-sliced breads became available, the TV was invented and radio vastly improved with the introduction of the first commercial station, which in turn helped usher in the Jazz Age. And before the dawn of memes, flagpole-sitting became a thing. As a whole, the 1920s made for a rip-roaring decade – until, of course, its excesses ultimately resulted in the stock market crash of 1929.

A hundred years later, we are seeing trends that suggest we are boomeranging back to the future. Inflation has returned, reaching its highest levels in 40 years, and interest rates have been rising rapidly in response. Debt as a percentage of GDP has climbed, and energy prices have rebounded. On the geopolitical front, with conflict abroad and escalating tensions, the world is increasingly deglobalizing, reversing the trends of the past several decades. All of this has caused stock market volatility to rebound, with the highest levels of trading days +/- 1% since the Global Financial Crisis.

U.S. S&P 500 Total Returns (1937-2022)

Source: AGF Investments Inc., as of November 28, 2022.

Is this period, like the 1920s, bound to end in disaster? We don’t think so. Some important trends are moving us forward. Innovation continues to result in new investment opportunities. Sustainability, precision medicine, autonomous vehicles, robotics and artificial intelligence, among other innovations, represent a ripe landscape for future investment. And despite the whirlwind of global events over the past three years, overall returns so far in the 2020s have been remarkably normal. The annualized return of the S&P 500 Total Return Index since Jan. 1, 2020 (through November 25, 2022) has been 9.7%, according to Bloomberg data, which is close to the long-term total return of U.S. equities of 9.5% over the past 120 years. Furthermore, over the course of history, U.S. equities have tended not to experience two negative years in a row. There are bubble-related exceptions, like the “Nifty Fifty” and the “Tech Bubble” of the early 2000s, but the most common outcome has been returns in the 10% to 20% range in the year following one that saw negative returns.

Given widespread investor pessimism today, this is useful context. Historically, investing in stocks after a 20% decline has tended to yield good outcomes for investors. We believe this time will be no different – this does not look like 1929 all over again. And investors will be well served to stay invested and focus on the long term.

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Tony Genua
Senior Vice-President and Portfolio Manager
AGF Investments Inc.

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