Another anniversary. Hopefully the last for a while!
You might recall that last September and October marked the 10th anniversary of the onset of the financial crisis in 2008. Those were scary days, when banks failed, Wall Street needed the federal government’s rescue, many credit markets stopped functioning, and the stock market was “waterfalling” 7% on some days. Thanks to a combination of cooler heads and the government’s numerous backstops, the panic that gripped financial markets subsequently subsided by November.
The recession that had begun before the financial crisis, however, worsened dramatically, as businesses cut millions of jobs and consumers hunkered down and spent less. For this reason, stocks continued to decline all the way until March, 2009. They hit their nadir on Friday, March 6, 2009, as the S&P 500 hit an intraday low of 666, which clearly should have been a sign of “peak Satan.” The market rebounded in the last hour of trading that day. On the following Monday, March 9, the market vacillated but in the end, finished slightly lower on the day, although it never reached the 666 level intraday. The next day, Tuesday, the market started moving up and never looked back. This is why you variably hear that the market hit its bear market low either on March 6 (intraday) or March 9 (closing price). On one of those days, the bear market ended and the bull market began, and the bull has been running for 10 years now.
I’ve had the great pleasure in recent weeks of going back in time, by rummaging through old files. This effort has been largely prompted by the renovation in our offices. The construction crew is headed to my office soon, and the file cabinets need to be movable, i.e. a lot lighter than they were. We have purged a lot of unusable stuff, and I’ve discovered that a lot of the research that we have saved over the years has been just short of useful.
But there have been some gems, needles in the haystack. What have been especially illuminating are the voluminous notes that we have written on printed research over the years. This gives us an idea today of what we were thinking at any given time. We defended a lot of stocks when they were worth defending, though some were not. Our memories of events do change over time, so it’s been really helpful to see the raw, honest emotions that we were feeling at the time.
We sent a lot of emails to customers during the financial crisis. One of the last we sent was on March 5, 2009, and it happened to be one of the longest. For your edification, or if you are having trouble sleeping lately, we have attached it below.
The intention with this tome was undoubtedly to convey “hang in there, we’re almost through this.” To sit here today and look back on the deepest depth of the bear market, from the comfort of a market that has more than quadrupled since then, is both satisfying and a little unsettling at the same time. Let’s put this report in proper perspective; at the low on March 6, 2009, the market was down 26%…since the year 2009 began! This after a -37% total return for the S&P 500 in 2008. In total, the 666 low was a full 60% down from the 2007 high.
What did we see on March 5?
First, we saw credit markets having healed from the worst in September and October.
Second, we viewed the economic response of businesses and consumers to have been extremely rash. As a result, there would be massive pent-up demand in the economy at some point, because consumers were winnowing even their food inventory, businesses had slashed their inventories to the bone, and they had slashed all but emergency capital spending, even deferring maintenance in some cases.
Third, the second derivative of growth had actually turned positive. The ISM purchasing managers’ index can be used as a second derivative. It rose from 32.9 in December to 35.8 in February. Anything under 40 is still recessionary, but that rise indicated that the economy was falling at a slower rate. This was later borne out by GDP growth figures which showed that 1Q09 GDP fell 5.4% (annual rate), after falling 8.2% (annual rate) in 4Q08. 2Q09 GDP fell only 0.5%, and the recession was declared to have ended in June. The second derivative can be your best friend if you let it.
Fourth, the yield curve, copper, and markets outside U.S. were showing positive signs.
Finally, stocks had fallen an unprecedented amount, even compared to the Great Depression. While high-quality stocks held up relatively well amidst the carnage of 2008, when they were a beneficiary of the “flight to quality,” even they were getting trashed in 2009.
There is no shortage of stories we could (and frequently do) discuss from there. To what extent did the government’s never-ending stream of stimuli help the recovery? Who was responsible for the housing bubble? What lessons has the financial industry learned?
Suffice it to say that one lesson re-learned is hindsight offers perfect vision. In real time, vision is blurry. I re-looked at the news headlines on Friday, Sept 12, 2008. For reference, it was on Monday, Sept 15 that Lehman Brothers went bankrupt, which set off the near-collapse of the financial system. The previous Friday, there was nary a mention of anything to do with the financial system in any newspaper other than the Wall Street Journal, whose top story was about Lehman struggling to find capital, but just as big a story was the impending arrival of Hurricane Ike and military activity in Afghanistan. The Dow actually rose 1.5% that day. Clearly, the prevailing wisdom was that Lehman was an isolated incident.
The next business day, Monday, saw the failure of Lehman, which set off a collapse of the subprime mortgage market, which triggered a witch hunt that would claim numerous victims within a day, including Merrill Lynch and AIG. But even on that Monday, AIG was holding out hope that they would be able to somehow to either hive off or get a government backstop for their ailing credit insurance division. S&P lowered AIG’s credit rating to…A-! A-! This was the day before the government bailed out the company by nationalizing it.
How will 2019 look from the vantage point of 2029? Only time will tell. In 3 months, the current economic expansion will be the longest in history, surpassing the golden era of the 1990s, whose expansion lasted exactly 10 years. While this economic cycle is long in the tooth on many levels, it has been void of any real boom. Booms typically lead to busts. Can you have a bust without a boom? That’s the big question. Can a bull market end without a boom, when its last 4 years have seen net withdrawals from equity funds? That’s the other big question. It has been easy to stay fully invested in stocks because of these two factors.
The market’s rally from the Christmas Eve correction low has been impressive, and we have almost fully recovered the drop since the peak in the market last September. We are mindful that stocks are somewhat expensive, and we are also mindful that the economic outlook and the outlook for earnings in 2019 have both continued to weaken, even as stocks have performed well. BUT, we still expect growth for both. Bonds, meanwhile, seem priced for worse.
We are watching our list of warning signs for the bull market’s top, and still none of the 10 is really valid. The yield curve has not inverted yet, and wage growth is still below the danger zone of 4%, although both factors are close. We might be on the precipice of a boom in IPOs (initial public offerings) in 2019. Uber, Lyft, Airbnb, Palantir, WeWork, and Pinterest are among the big companies looking at going public. That said, a requisite for an IPO boom would necessarily be a stock market that continues to be strong as the year goes on.