recovery

About Those Good Old Days

© Can Stock Photo / Chuckee

A client recently expressed a desire to return to the good old days, when we didn’t have all this turmoil and trouble. Wouldn’t we all like that?

But we human beings have some quirks. One of them is the universal sense that, back in the misty past, things were normal, or stable. This idea may not stand up to scrutiny.

If we confine our study just to the economy and markets, the history we’ve lived through has this to say:

1. In the early 1970’s, a mania centering on big blue chip stocks hit the market. It was thought that you could just buy them at any price, and own them forever while they went up and up—“one decision stocks” they were called. Prices ballooned to extremely high levels. The major stock market averages peaked, then sold off more than 50%1.

2. The 1970’s also saw a pair of Arab oil embargoes that resulted in spiking gasoline prices, shortages, gas stations out of gas, and rationing. Over the course of the decade, inflation rose, eventually going over 10%. Unemployment went over 10% in the mid-decade recession2.

3. The early 1980’s began with back-to-back recessions, 15% mortgage interest rates, and inflation at unprecedented levels. The unemployment rate went over 10% again. Long term bonds declined in price as interest rates rose. A mania in oil stocks that began in the 70’s ended badly early in the decade3. The biggest one-day plunge in the Dow Jones Industrial Average ever—22% in a single day—happened in 19871.

4. The 1990’s began with the cleanup from the savings and loan crisis. The Federal deposit guarantee fund had gone broke, along with thousands of financial institutions. The value of housing, which began to fall nationwide in the late 1980’s, didn’t recover until 19924. The bond market suffered its first annual loss in seventy years in 1994.

5. Clients, most of you remember the bursting of the tech bubble in 2000, the attacks on 9/11, and the so-called Great Recession of 2008-2009. You already know the fine points; it was not good fun for investors.

6. The current decade, free of recessions so far, has had a lot of ups and downs. The downgrading of US Treasury debt and the recurring Greek financial crisis were two of the main events. The zero-interest-rate policy of the Federal Reserve distorted prices in some sectors of the investment markets, some observers believe.

The resilience of the equity markets over these many decades is astonishing to us. We had all these challenges and issues, and somehow the country came out on the other side, every time. We suspect this general trend will continue. The problems of today will give way to solutions– and new problems–tomorrow. That seems to be how it works.

In the meantime, financial strategies that have worked through the decades may be the best way to approach the future. There will be winners and losers in every change and challenge. We may not be able to get back to those mythical good old days, but we can make the most of what we have to work with.

Clients, if you wish to discuss this, or your situation, please email or call.

1S&P Dow Jones Indices, https://us.spindices.com/indices/equity/dow-jones-industrial-average

2Federal Reserve Economic Data, Federal Reserve Bank of St. Louis, Unemployment and Inflation

3Federal Reserve Economic Data, Federal Reserve Bank of St. Louis, Oil Prices

4Federal Reserve Economic Data, Federal Reserve Bank of St. Louis, Housing Prices


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Stock investing involves risk including loss of principal.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.

Slow Burn

© Can Stock Photo Inc. / cafaphotos

We are now in the 7th year of economic expansion and recovery since the last recession. Many commentators insist that after such a long stretch, the next recession must surely be right around the corner. Of course, they’ve been insisting this for the past 7 years–remember the term “double dip”? The recovery didn’t make it a full year before people started predicting its demise, and now here we are seven years later.

Part of the longstanding skepticism surrounding this market cycle is grounded in the weak performance of this expansion. It’s been a long, slow recovery since the recession started in 2008. In a lot of people’s minds, those two things don’t go together. They think, “The recovery is going slowly, so it must not have enough fuel to keep going for very long.” There is a certain intuitive appeal to this way of thinking. We tend to see something moving quickly as having more momentum, so it would take longer to come to a stop.

The economy doesn’t really work in terms of “momentum”, though. Instead, market cycles tend to be driven by sentiment. In a normal expansion phase, optimism feeds into faster and faster growth, eventually creating a bubble. When the bubble finally pops at the height of its exuberance, values plummet and the economy is likely to plunge into recession.

You can think of it in terms of an out of control fire. The bigger it gets, the stronger it gets—but the faster it burns through its fuel. A raging conflagration will consume its fuel and die down to embers faster than a more contained fire.

In this analogy the current economic cycle has been a slow, cautious burn. The fire is burning away quietly but hasn’t really erupted into a general blaze—pessimism is widespread and we haven’t really seen the kind of manic stampede that marked the last days of the previous few expansions.

We never know how much fuel there is left for our “fire.” The expansion must eventually run itself down, but this may be a matter of months or days or years—we can’t be sure. However, we view the slow pace of recovery as an indicator that there may be a good bit of fuel yet untouched.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.