A Crisis Less Extraordinary

080519_USEconomy1My Comments: For those of you who can stomach economics and the sometimes arcane language of investments, this is an interesting analysis. It comes from a source called Seeking Alpha where I have a membership. Their articles are also infused with lots of charts which I often choose to leave out.

So if for any reason you cannot get to their site to continue reading and see all the accompanying charts, let me know and I’ll forward to you a PDF file with the full article. All this is to help you get ready for the next downturn which will happen.

Eric Parnell, CFA, Gerring Capital Management Aug. 14, 2014

Summary
• It is often said that the financial crisis that was unleashed from July 2007 to March 2009 was a once in a century event.
• But upon closer examination, the market shock resulting from the financial crisis was not all that extraordinary.
• In fact, it was rather modest in many ways when compared to other major historical bear markets.
• And this fact alone may be setting investors up for a far more challenging bear market experience the next time around.

It is often said that the financial crisis that was unleashed from July 2007 to March 2009 was a once in a century event. Some investors even take comfort in this notion with the belief that any future stock bear markets will almost certainly pale in comparison. In short, if one could survive the financial crisis, one can certainly weather what may come in the future. But upon closer examination, the market shock resulting from the financial crisis was not all that extraordinary. In fact, it was rather modest in many ways when compared to other major historical bear markets. Instead, the only thing that has been truly extraordinary this time around has been the policy response. And this fact alone may be setting investors up for a far more challenging bear market experience the next time around.

Second Worst Bear Market In The New Millennium

The bear market sparked by the financial crisis was not even the worst bear market we have experienced since the calendar flipped into the new millennium. In many respects, the bear market associated with the bursting of the technology bubble was worse. This is due to the fact that the magnitude of the decline during both bear markets was effectively the same. But stocks (NYSEARCA:SPY) reached the bottom of the financial crisis bear market in a little less than half the time at 412 trading days by March 2009 versus the more than 700 trading days before stocks reached their final post tech bubble bottom in March 2003.

2000 VS 2008Now some might say that what made the financial crisis bear market worse was the sharp magnitude of the declines from October 2008 to March 2009. To this I say nonsense. These two past bear markets moved in complete lockstep for the first 300 trading days. It was not until policy makers allowed Lehman Brothers to fail when the financial crisis bear market deviated to the downside. But the net effect of this outcome was the stock market equivalent of ripping the band-aid off quickly instead of slowly. In short, the Lehman failure delivered stock investors to the bottom much more quickly, which many could argue ended up being a great advantage. For even if policy makers helped rescue Lehman the same way they saved Bear Sterns six months earlier, it still would not have alleviated the rotting mortgage debt problem that was festering in the financial system at the time. Instead, the stock market likely would have continued dying a slow and painful death into the summer of 2010 if not longer. And since policy makers seemingly felt like they screwed up by letting Lehman fail, they have been overcompensating ever since by printing trillions of new currency to support the stock market and the economy, the latter of which has been in vain.

Verdict: Bursting of the tech bubble was worse than the financial crisis for investors.

Great Depression Markets Much Worse

The bear market during the financial crisis was also mild when compared to those during the Great Depression. When matched up against the bear market from 1929 to 1932, the financial crisis market was relatively mild in comparison until the very end and was not even able to catch up to the pace of the Great Depression bear market at its darkest moments. And while the financial crisis bear market ended after 412 trading days, the Great Depression bear market lower for a few more years before finally ended down nearly -90% on a price basis.

CONTINUE-READING

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