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Thursday, March 8, 2012

Three Years Later

Tomorrow marks the three year anniversary of the market bottom during the financial crisis of 2008 - 2009.  This month is also the three year anniversary of this blog.  The good news is that we are all still here, which seemed less than certain during the depths of the financial crisis when the end of civilization looked possible.  (That may be hyperbole, but remember how scary it was back then?)  

Back in March of 2009, we posted this presentation, where we compared the then financial crisis to the two previous significant economic storms of the past century; the Great Depression and the Bear Market and Recession of the 1970's.  The picture below was included in our presentation from three years ago.  It shows the performance of the Dimensional Market Adjusted 2 Index - a broad index of US stocks - from the market peak before each of the three market crashes.





We said back then that if the financial crisis turned out like the 1970's, then maybe we were close to a market bottom.  However, if it turned out to be more like the Great Depression, then there was a lot more pain to come.  

We then went on to make the argument that the current crisis resembled the 1970's more than the Great Depression, and so we hoped the market was close to it's low.  Fortunately, we were more prescient than we imagined, and February of 2009 did indeed mark the month-end market bottom (the actual market low was on March 9th).  The picture below is the same graph as above extended out to 52 months showing how the story has played out since.














You can see that money invested at the market peak of October 2007 has indeed fully recovered.  However, in no way am I implying that it is great news that investors have seen 0% return over the past 4 years. On the other hand, it is not the first 4 year period that stocks have returned nothing, and it won't be the last.  

The good news is that things did not turn out as badly as feared.  I distinctly remember a conversation I had in late 2008 with a nurse while waiting to see my doctor.  She and I (as was everybody) were talking about the financial crisis, at which point she said she didn't believe that the market would ever recover in her lifetime. I told her that it probably would, and, thankfully, it has.

Luck aside, it is impossible to predict what will happen next, despite the best knowledge and information. There are simply too many important variables that are constantly changing. There are a multitude of reasons to fear the economic future and just as many opportunities for growth and success. We will continue to use this blog as a way to discuss the complex economic and financial future. In the meantime, let's take a minute to be grateful that the worst case scenario was just that, a scenario and not a reality.