After World War 2 America enjoyed a long and steady economic recovery that was reflected in stock market values. It was characterized by low inflation, low unemployment and an America that wanted to live the American Dream. This period of time went (with a minor hiccups) until 1972. It was a slowly developing bubble that burst in 1972 due to an oil crises and high interest rates.
In 1982 another bubble began to form due to greedy American companies that started to gobble up other companies in what became “merger mania”. And as always, investors soon joined that party. And as always, that bubble burst in 1987. October of 1987 featured the largest one day stock market drop in history.
Fast forward to the late 1990s and an unprecedented and huge five year run of the U.S. stock market. Investors threw caution to the wind and bought new and existing tech companies that weren’t even making money, never mind profits, at stupidly high prices. Once again, greed ruled. Then that tech bubble burst in 2000 and was followed by a painful 30 months of market volatility.
Our next bubble started forming in 2003 as interest rates started coming down significantly. Cheap money encouraged folks to buy more house than they probably needed with a bigger mortgage. Others refinanced or took out a Home Equity Line of Credit to make home improvements, buy cars, pay off charge cards, and maybe even help out the kids or take a vacation. This real estate bubble blew up in 2007 and took the stock market with it.
Things started getting better in March of 2009, primarily because the U.S. government began printing money and flooding the economy with cheap dollars. Lenders started lending again and slowly people started to spend money again. This time people bought stocks with that cheap money because interest rates on bonds and CDs were low to non-existent. We had another historic run in the stock market that probably ended about June of 2015. This time, it was the rest of the world that took us down. Greece! The European Union! China! and oh yes, plunging oil prices. It is a bit ironic that markets went down in 1973 due to high oil prices, and are going down now due to low oil prices. Nobody said it has to make sense!
So what is the point? it would be wonderful to live in a world where we didn’t have bubbles and the downward volatility that inevitably follows. But that is not likely to happen. People and governments get greedy and do dumb things. They drive up the prices of assets beyond what they are worth, and are unaware that they are doing so. We need that downward volatility to correct those excesses, as painful as that may be, so we can get back reality. This has been going on for hundreds of years all over the world. Bubbles and volatility are normal and natural occurrences. It is just very difficult for us to accept that and act accordingly. Acting accordingly means sticking with your investment strategy and waiting for things to get better. The longest market downturn since 1948 has been thirty months. I am guessing we are at about 8 months and counting into this one. They always feel longer than they are.
As always, call if you want to talk or meet.
Michael J. McNamara, Ph.D, CFP®
CERTIFIED FINANCIAL PLANNERTM