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Lessons From The Past

- By The Notorious CFP®


As we attempt to interpret where we are in the post-COVID era and how to move forward, it's advantageous to deconstruct the two major crisis of the 21st century that proceed the pandemic in order to ascertain whether there are both mistakes and lessons that can be identified then so as not to repeat these mistakes again today.

The Great Financial Crisis

It's beneficial to remember that the slow and steady unraveling of the US housing market, culminating in the Great Financial Crisis (GFC) started in 2005, was already weighing heavily on the economy by 2006 and began pushing the stock market down as early as late 2007Stock prices continued falling through 2008 and market fever ran it's course through March 2009, at which point the market and most investors were down much more (over - 50%) and for much longer (17 months from the all-time highs of October 2007) than we are in this current economic situation - and for an actual legitimate reason (as opposed to today's general angst about current conditions and future outcomes).

By late 2008, most investors were sobering up to residential real estate's myriad and rampant excesses (as made famous in the remarkable book that was later immortalized in an even better movie, The Big Short). The financial sector that had fueled the home-as-an-investment orgy was also at genuine risk of collapsing in on itself, banks large and small were staring down insolvency and investment firms were closing up shop left and right. For weeks, the nightly news recycled a continual slideshow of well-dressed white-collar professionals standing on the sidewalks in Manhattan with their careers in a cardboard box, crying and talking into their cell phones.  

The extreme red-hot residential real estate growth today finds its roots in the aftermath of the previous housing crisis, as home builders and developers were decimated in the ensuing post-GFC years, an environment of prolonged under-development that continued for almost a decade. Contractors closed shop and moved on to other industries, while housing inventory shrank to such minimal levels that to date there is still insufficient supply - even amidst absurd valuations, obscene materials costs and the specter of crippling property taxes for new homeowners or those upsizing in the past few years. 

Even at the scorching current pace, it may take many years for housing supply to catch back up, and rapidly rising interest rates could -and definitely will- extend that timeline even further. This is but one reason that building is likely to continue well past the point of prudency over the next few years. Real estate is somewhat unique as the only alternative to building for some professionals (in a market where few can afford to move into a new and higher mortgage rate) is often laying off and closing the business. As such, the incentives of the former create distortions that often cause boom-and-bust cycles very similar to the energy industry. 

When the Great Housing Crisis began to unravel in late 2007, people were still carrying Nokia's, the iPhone was barely a thing and you couldn't trade stocks on it. Is it possible that change is influencing today's manic market?  

The Dot Com Bust

We would be remiss to ignore the the first recession of the 21st century, a period in which the market seem to bounce aimlessly from crisis to crisis between 2000 and 2002. The collapse of mega-hedge fund, Long Term Capital in 1998 was soon followed by the Y2K hysteria of 1999, the dotcom bust of 2000 (with the tech-heavy NASDAQ exchange losing over 80%!)... followed by 9/11, the ensuring "War on Terror" and finally the collapse of Enron and WorldCom in 2002. 

The cascade of economic uncertainty that ensued stretched well over three full years, butchered an entire generation of investors and still seems worse (to me) than our current environment, for reasons that I cannot completely explain. (Publicly anyways, although I have my theories.) I suspect that we've simply different people now, and I can guarantee from experience that we're different investors. 

So why are investors that have been through much larger and much more serious corrections in 2000-2002, 2008-2009 and 2020 so much more spooked by this market environment? Have markets changed that much? Or have we? It seems trite and superficial to argue that "we're older and inherently 'closer to our financial goal timeline?'" Or is there more at play? 

Even my clients in their 60s and 70s (who can look forward to decades more of reasonably comfortable living) still openly confess to me that they "don't have the time to recover from another correction." That's a refrain I hear literally every day and I do understand it, at least the premise (if not the reality).

Others- even those who were investors during the Jimmy Carter administration- still fear we'll never recover from this presidency either. I'm told, "this time it's different" with increased frequency, a phrase that is the well-known most dangerous words in the stock market. Somehow this most recent downturn feels worse to many of my clients, and that's why I believe the subject is worth exploring in greater depth, and why this recent stock market "yard sale" - my words- where investors are communicating through their actions that, 'everything much go at any price!" has been so much more stressful than in the past. 

We've been here before. And this too shall pass.