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I thought it might be time to check in again, as part of our
ongoing effort to add some perspective to the daily grind rolling
off the presses and out of your television screen.
As you may or may not have noticed, this week opened with a
record rise in the stock market, followed on Wednesday by a record
fall (at least in point if not percentage terms), and as I write
this the market has just closed with a 400 point gain after having
been down by almost that much earlier in the day.
Is this starting to feel "normal?" The one thing we can be
sure of in a world where the dollar fluctuates by five cents and oil
by $10 on any given day is that anyone who thinks they can make
short term forecasts on the economy or the stock market is fooling
themselves.
However, while I'm probably not entirely free of self-delusion, I
do believe that a general sense of optimism is not misplaced. That
theme led my friend Mark to give me a set of poms poms on Monday to
better equip me for my role as cheerleader (I'm still going to give
you a show Mark, as soon as I can figure out which words precede
"what's that spell?"). However, I think it's important to emphasize
that the advisory team here at Yeske Buie is not unmindful of the
magnitude of the current crisis. We know that the near-term
negatives are real, and include, among other things:
- The housing crisis
- Falling consumer confidence
- A credit crunch that has reduced access to capital for
companies and consumers
- A recession both here and abroad
These are all real problems and they have been reflected in
falling stock prices. The situation is complex, however, and
includes many positive factors as well. Among those can be
found:
- Significant, coordinated intervention by central banks around
the world to contain the crisis and provide liquidity to the
system.
- The banning of short-selling of financial stocks to reduce the
more extreme forms of speculation
- Dropping oil prices (now less than half their recent highs)
which reduces concerns about inflation, giving central banks more
latitude to keep interest rates low or reduce them further.
- Stock valuations that by many traditional measures have
reached bargain levels.
Of course, at all times and in all places, one can find causes
for both optimism and concern.
If we had made our list of positives and negatives 10 years ago,
in the Fall of 1998, we would have included threats from what was
then called the "Asian contagion," which involved the collapse of
currencies in Asia and the Russian ruble and the implosion of Long
Term Capital, a massive hedge fund that blew up and nearly brought
the world financial system down with it.
Had we carried out this exercise at the end of 1990, when the
market was also down sharply, we would have listed recessions in the
US, Canada, the UK, and Australia; the S&L lending crisis (the
last time the government had to intervene); and the broad slump in
residential and commercial real estate. Not to mention the
huge uncertainty about how to respond to the invasion of Kuwait by
Iraq.
In December 1990, the Knight Ridder newspaper chain ran an
article with the headline "Bank crisis risks turning recession into
depression." The causes for concern in this gloomy article
look pretty familiar:
- Banks going under at a level not seen since the 1930s
- A resulting credit crunch and pullback in lending
- Plunging consumer confidence
- A 50% decline in the stocks of leading banks
Psychologists tell us that the human brain is unable to recall
pain accurately. As a result, we overestimate the level of
pain we're feeling today compared with the past. Whenever we enter
these kinds of market conditions, it always feels like it's much
worse than it's ever been before.
The tech bubble in 2000 was rationalized by investors who said,
"it's different this time." Today, we're hearing people using the
same words, saying today's downturn can't be compared to those of
the past.
The aftermath of the tech crash reminded us why the words, "it's
different this time," can be so costly for investors. It wasn't
different in 2000, and a strong case can be made that it's not
fundamentally different today. And, in fact, that when it comes to
market cycles, it's never really different.
I'd like to end with a quote from the Oracle of Omaha, Warren
Buffett, speaking last Friday on CNBC:
"I have no idea what the stock market will do next month or
six months from now. I do know that, over a period of time, the
American economy will do very well, and investors who own a piece of
it will do well."
Take care and check in with us if you'd like to talk.
Dave
David B. Yeske, CFP®
YESKE BUIE . . . Live BigSM
220
Montgomery Street, Suite
900
San
Francisco,
CA
94104
(Phone) 415-956-9686
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