While it’s true that population growth and productivity determine the rate of growth in a country’s economy, the conventional wisdom that faster-growing economies lead to higher investment returns isn’t true. The wrong conclusion is reached because it fails to account for the fact that markets are highly efficient in building information about future prospects into current prices. There are also other explanations.
The stock market hates uncertainty, and there is plenty of uncertainty with respect to the conflict between Russia and Ukraine.
This post focused on violence in the Middle East, specifically Syria, and the potential that the United States could enter the conflict and what that might mean for the markets. Given the recent turmoil in Eastern Europe and the developing international crisis, we are responding to requests from Enterprising Investor readers to provide an update.
So, is now the time to beat a hasty retreat from stocks?
Let’s examine how capital markets have performed during times of war.
As of July 2023, the largest all-time bankruptcy in the United States remained Lehman Brothers. The New York-based investment bank had assets worth $691 billion U.S. dollars when filing for bankruptcy on September 15, 2008. This event was one of the major points in the timeline of the Great Recession, as it was the first time a bank of its size had failed and had a domino effect on the global banking sector as well as wiping almost five percent of the S&P 500 in one day.
In March 2023, for the first time since 2021, two banks collapsed in the United States. Both bank failures made the list of largest bankruptcies in terms of total assets lost: The failure of Silicon Valley Bank amounted to roughly $209 billion U.S. dollars worth of assets lost, while Signature Bank had approximately $110.4 billion U.S. dollars when it collapsed. These failures mark the second the third largest bank failures in U.S. since 2001.
The collapse of Silicon Valley Bank and Signature Bank painted an alarming picture of the U.S. banking industry. In reality, however, the state of the industry was much better in 2022 than in earlier periods of economic downturns. The share of unprofitable banks, for instance, was 3.4 percent in 2022, which was an increase compared to 2021, but remained well below the share of unprofitable banks in 2020, let alone during the global financial crisis in 2008. The share of unprofitable banks in the U.S. peaked in 2009, when almost 30 percent of all FDIC-insured commercial banks and savings institutions were unprofitable.
From agrarian economy to global superpower in half a century—China’s transformation has been an economic success story unlike any other.
Today, China is the world’s second-largest economy, making up 16% of $86 trillion global GDP in nominal terms. If you adjust numbers for purchasing power parity (PPP), the Chinese economy has already been the world’s largest since 2014.
The upward trajectory over the last 70 years has been filled with watershed moments, strategic directives, and shocking tragedies — and all of this can be traced back to the founding of the People’s Republic of China (PRC) on October 1st, 1949.
Benjamin Franklin famously observed, “The only two things you can count on in life are death and taxes.” To which an unknown wag offered the sardonic and almost equally famous rejoinder, “That may be true, but at least death doesn’t get worse every time Congress reconvenes.”
Let’s start by belaboring the obvious and note that high taxation makes it challenging to create and accumulate wealth. Sure, everyone should contribute a fair amount toward the functions of government, but even most patriotic Americans could feel just as patriotic while paying a whole lot less. Unfortunately, it is generally difficult to escape the long reach of the (tax) law; fortunately, however, there is one specific tax-reduction tool widely available to all U.S. taxpayers, namely, the Roth IRA and its kissing cousin, the Roth 401(k).
The sales pitch for a Roth IRA is compelling: Money is contributed to the account on an after-tax basis, meaning that people do not get a current income-tax deduction for the contribution. But once the money is invested, it can go into almost any investment activity you please (subject to the limitations imposed by the custodian of the account), and all income earned from those investment activities—whether interest, dividends, or capital gain—is excluded from current federal income tax (and typically state income tax) at both the IRA level and at the taxpayer level. Moreover, when it comes time to distribute funds from the Roth IRA in the future, these distributions are likewise fully exempt from federal (and usually state) income taxation. Thus, the Roth IRA allows taxpayers to enjoy a tax-free investment that earns a full market rate of return. All in all, a very sweet deal.
