Ten Years Later - September 17, 2018

Saturday September 15th marked an ominous anniversary. Ten years ago, Lehman Brothers declared bankruptcy, setting off a financial crisis that would be felt around the globe and lead the U.S. into the worst recession since the Great Depression.

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The road to recovery has been long and uneven, but the economy has recovered and continues to expand. The current bull market is the lengthiest of the modern era (St. Louis Federal Reserve, S&P 500 Index data).

But the question that usually arises – can another financial crisis occur? We can’t unequivocally say never, but the banks today are much better capitalized than they were ten years ago. Lending standards, especially related to housing, are more realistic.

Today, we’re not seeing the kind of excessive speculation in the economy that we saw in the late 1990s – tech/telecom/Internet – or the euphoria in housing during the mid-2000s.

But risks never completely abate. Rising debt in emerging markets bears watching. U.S. banks were quick to rise to the challenge and bulk up on capital early in the recovery, but European banks were much slower to react. And various countries, such as Italy, are grappling with challenges.

Lessons learned

It’s not about timing the market. It’s about time in the market, diversification, and the appropriate level of risk.

Headlines can and will create short-term volatility. We saw that earlier this year. And we’ve seen it at various times in recent years, but patient investors who stuck with a disciplined approach were rewarded. Longer term, stocks historically have had an upward bias.

While heading to the safety of cash during volatility may bring short-term comfort, opting for the sidelines may have long-term costs.

According to a Fidelity study, “Investors who stayed in the markets (during 2008) saw their account balances—which reflected the impact of their investment choices and contributions—grow 147%” between Q4 2008 and the end of 2015.

“That's twice the average 74% return for those who moved out of stocks and into cash during the fourth quarter of 2008 or first quarter of 2009.” Even worse, over 25% who sold out of stocks during that downturn never got back into the market.

The opposite is true, too. Don’t become overconfident when stocks are surging. Some folks begin to feel invincible and are tempted to take on too much risk. It gets them into trouble, too.

A final anecdote

An economics professor in a college business cycles class relayed a story about post-Depression/post-WWII America I’ve never forgotten. Call it the tale of two companies.

At the end of WWII, there was fear the U.S. would slip back into a Great Depression. With the ceasing of hostilities, the massive expenditures on the war – tanks, bombs, ships, planes, etc. – were no longer needed. Without that production, another depression could ensue.

Montgomery Wards hunkered down, betting on a return to 1930s-like conditions. Sears, on the other hand, saw opportunity. Sears bet that pent-up demand and the return of troops to the U.S would drive economic activity. Sears set out to capitalize on a new era and built stores in the growing suburbs.

Wards eventually figured it out and reversed course. But it was too late, and it never caught Sears.

The U.S. economy is quite resilient. It has withstood many shocks since WWII. At times, hunkering down may bring short-term relief, but it has rarely been a strategy that has produced long-term wealth.