Adam Shell explains a bull market on the occasion of the current bull market breaking the record for longest ever.
The sky didn’t fall. Armageddon didn’t arrive. Society didn’t collapse.
But 10 years ago, with the nation trying to emerge from the worst recession in decades, all that wasn’t obvious. It was against that numbingly negative backdrop that investors, on balance, finally decided they would start bidding up stock prices rather than pulling them down.
Hence was born, on March 9, 2009, one of the strongest bull markets ever.
People who exited the stock market around March 2009 and never re-entered paid a huge price in terms of missed opportunities. The subsequent rebound has been one of the strongest ever, with the broad Wilshire 5000 index up more than 300 percent, including dividends.
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Here are some lessons we might have learned in the aftermath:
The market didn’t wait for an ‘all clear’ signal
Stocks began their rally against a bleak economic backdrop back in March 2009. Nobody rang a bell that the worst was over. Unemployment stood at 8.7 percent and would continue rising for seven more months. The nation’s GDP gains were anemic, housing prices still hadn’t hit bottom, and there were many other signs of lingering economic weakness.
But focusing too much on the negative headlines likely convinced many investors to get out at what turned out be a bottom, noted Michael Grosso of TCI Wealth Advisors in Scottsdale, Arizona. Doing nothing at such times, while perhaps feeling unsatisfying — if not paralyzing — often is the best move to make.
“It all comes back to tuning out the noise and focusing on your goals,” Grosso said.
Market bottoms, and tops, don’t become obvious except in hindsight.
Safety-seeking investors paid a big price
The rebounding stock market tells only part of the story of missed opportunities.
Sitting on the sidelines would not have been so bad if savers earned decent yields for parking their cash in money-market funds, bank certificates of deposit and other ultrasafe instruments. But they didn’t.
Yields dropped sharply and remained depressed for a lengthy period. In fact, yields paid to savers still really haven’t bounced back in a decisive way, despite nine rate hikes by the Federal Reserve over the past couple years.
If you had parked $100,000 in six-month CDs in 2006, you would have earned more than $5,200 in interest that year, according to JP Morgan Asset Management. That same scenario in 2018 would have generated less than $600 in interest.
Banks and other lenders have been able to attract enough cash that they haven’t needed to pay enticing yields, or even decent ones. So many people were traumatized by the 2007-2008 plunge, when the stock market lost more than 50 percent, that they were willing to accept dismal yields on cash investments.
“Every time (since then) when there was a sharp drop in the market, people thought it was 2008 all over again,” said David Daughtrey, a financial adviser at Copperwynd Financial in Scottsdale. “They were fighting the last battle.”
Some economic theory got thrown out with the wash
One reason the past 10 years have been so baffling, if not outright frustrating, is that some of the economic principles that we learned in textbooks just didn’t pan out.
For example, Daughtrey cites efforts by the Federal Reserve to cut interest rates close to zero, then to embark on an unprecedented pump-priming effort known as quantitative easing. Those measures, and others, should have triggered inflation and pushed up interest rates, but the impact was modest at best.
“Those policies didn’t have much impact on inflation,” said Daughtrey. “Economic theory says they should have.”
As another example, the federal government got its credit rating cut for the first time ever, yet investors just shrugged. Treasury bonds and other government debt remained as popular as ever, and their yields stayed low. Meanwhile, the dollar appreciated against most other leading currencies, also defying textbook explanations.
Nor has the yawning federal debt, which has climbed to unprecedented levels over the past dozen or so years, done much to boost inflation or interest rates.
Eventually, the impact of these trends might be felt more decisively. But for now, persistently low inflation and interest rates at this point in the economic cycle, given all the stimulus measures in place, have been a conundrum.
Americans haven’t shared equally in the rebound
The economy clearly is in a better place than it was 10 years ago, but that doesn’t mean the prosperity is widely shared.
Despite the lowest unemployment rates in decades — and substantial minimum-wage bumps in Arizona and other places — many Americans continue to struggle to make ends meet, they lack access to credit or have jobs that pay inconsistent income.
The homeownership rate has barely budged from its recession lows, an estimated 40 percent of families are living paycheck to paycheck, and there are other signs of financial stress that you wouldn’t expect 10 years into a recovery.
“Many of the positive headlines about our economy focus on low unemployment and rebounding incomes,” said progressive research group Prosperity Now in a January report on financial vulnerability. “Having a job does not guarantee financial stability, particularly if it doesn’t pay enough to cover your living expenses or offer consistent pay and good benefits.”
Affluent Americans have prospered, partly because they have owned investments all along and thus were positioned to benefit from the housing and stock market rebounds. Other Americans were left behind, in part because they didn’t own appreciating assets.
Investors learned some lessons, missed others
While many Americans still don’t have stock-market investments — and paid the price — the past decade was marked by a continuing rise of investor-friendly products and services, to which many people gravitated.
Harry Papp of L. Roy Papp & Associates points to the advent of low-cost index and exchange-traded funds, which gained popularity over the past 10 years or so. These portfolios typically are widely diversified and feature lower investor-borne fees.
“All else the same, you’ll get better results with them,” he said.
However, Jonathan Clements, author of the HumbleDollar.com financial blog, said he’s concerned that some people might have learned the wrong things from the past 10 years. For example, he points to those who assume U.S. stocks always will lead the pack simply because they have in recent years.
“Looking back over the past decade, many folks have concluded that U.S. stocks always outperform foreign shares, that bonds are for losers, and that all you need to own are large-company stocks, especially large technology companies,” he said.
Yet over the prior decade, from roughly 1999 to 2009, much of the reverse was true.
The lesson here is that markets and investments move in cycles, and no investments or asset classes perform well all the time. That’s why it’s important to build and stick with a broadly and globally diversified portfolio that includes stocks, bonds, cash and various subcategories — and to rebalance the mix periodically by taking some chips from your winners and reinvesting in laggards.
Rebalancing, said Papp, is a “really powerful” concept.
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