Broker Check

Three Things All Crashes Have In Common

| March 23, 2020
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Social distancing means something different for everyone.  For some it means watching TV, for others it means board games, etc.  For me, it’s been family time and research. 

I want to share with you some thoughts on this current crisis.  While it hasn’t been declared a “crash,” it may feel like one to you.  If that’s the case, there are some things you need to know.

Over the past 100 years there have been 4, possibly 5 stock market crashes (1929, 1987, 2008, 2010 and possibly 2020).  I didn’t personally experience the 1929 crash, but my kids are sure I was alive at that time.  I began my career in Financial Services in 1986, so the rest of these events are fresh in my memory.

Each of these events were traumatic for investors and, when they happened, they seemed like Armageddon.  They each happened for different reasons but, after careful review, they all have three main characteristics in common:

 

  1. The first characteristic in common is that an event and/or product arrived that most people didn’t fully understand. In 1929, Investment Trusts were all the rage, causing an asset bubble.  In 1987, it was “portfolio insurance” and corporate raiders driving stocks above their true values.  Each crash has its own underlying cause, but they’re all similar in that they involved something that wasn’t fully understood.  In the current crisis, a global illness seems to be the culprit. 

 

  1. The second characteristic in common is that the government and/or Federal Reserve response to the crisis, initially, was wrong. Please understand this is not a political commentary, but rather a look back with the benefit of hindsight.

In 1929, the Federal Reserve was a relatively new creation.  They repeatedly adjusted interest rates in the wrong direction.  In 2008, interest rates had been kept low for too long, creating an environment of too much liquidity and an asset bubble AND the federal government was allowing irresponsible borrowing for mortgages.  In the current crisis, the federal government is still deciding how best to address the situation.  If we rely on past experiences, they’ll eventually get it right after some missteps.

 

  1. The third item in common for all these crashes is the singular fact that keeps us investing - they were all temporary. Every one of the crashes eventually ended.  Some were longer than others (the 2010 “Flash Crash” was only 1 day), but they all came to an end.  Additionally, each event proved to be a tremendous opportunity to buy.  In the years after each crash, those market levels were never seen again.

 

As I’ve mentioned to you over the past few weeks, it’s always uncomfortable to watch the value of your portfolio drop.  But we must continue to follow the plan and not make a big mistake at the wrong time.

Please stay healthy and if you have any questions or concerns don’t hesitate to contact me, as usual.

Regards,

Joe

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