What Is Normal?
In 2009, after the so-called Great Recession clobbered stocks, one of the largest mutual fund companies (PIMCO) produced a set of economic and investment analyses that they named the “new normal.” Right now McKinsey & Company is currently promoting their viewpoint of post-COVID changes in the workplace and in the economy under the rubric of the “next normal.” Have you ever wondered just what is considered normal?
My Webster’s defines normal as “conforming with … an accepted standard… especially corresponding to the median or average of a large group.” But that definition is clearly lacking. Let’s take an example from investing (my favorite topic). The average annual return of the S&P 500 from 2000 through 2019 was 6.1%. In other words that number ought to represent a “normal” investment return for the first two decades of the 21st century.
But what if we extend the period back to 1990. Over the last three decades the S&P 500’s average annual return changes to 10%. That’s a huge difference! Which “normal” is correct? The answer: neither. That’s because the variation in returns (standard deviation in mathematical terms) is so wide. In 2013 the S&P 500 gained over 32%. In 2008 it lost 37%. It’s hard to establish a sense of normality when data fluctuates so greatly.
I bring this up because every time there’s some kind of unexpected event numerous prognosticators come up with “alternative normal” terms that imply the world has irrevocably changed. In the McKinsey example isn’t the shift really nothing more than the acceleration of a previously established trend (working from home) that got a boost both from COVID as well as from newer teleconferencing technologies? In PIMCO’s case the new normal turned out to be nothing more than the old normal within a protracted period of low interest rates.
Hardly anyone predicted the COVID-19 pandemic. But wasn’t it really part of a series of disease outbreaks over the last two decades (SARS, Ebola, Bird Flu, etc.)? The main reason it was not considered normal, especially here in the U.S., is because we weren’t prepared for it. By contrast, Japanese citizens commonly wear masks in public to prevent the spread of diseases. Their “normal” behavior helped to keep their COVID infection and death rate at a fraction of ours.
The antidote to fearful reactions to unexpected “abnormal” events is simply good planning. We should consider in our planning scenarios anything that has happened or even might happen. Take retirement planning for example. The S&P 500 dropped by 43% in 1931 and by 37% in 2008. There may be reasons why such a drop is less likely in the future, but it would be foolish to simply ignore the possibility of a recurrence. Retirement plans should therefore include some methodology to help retirees understand the risk they face and how well they are protected against it.
If you expect that anything could happen then “anything” is normal. It’s whatever the world happens to look like at the moment. And if that still concerns you, try this: “The trouble with the future is that it’s not what it used to be.”