Lessons from stock market’s 5-year running of the bulls
In early 2009, the stock market was in a free-fall. The Dow Jones industrial average had lost half its value in just 10 months. And with much of the loss coming in gutwrenching plunges, there seemed no end to the despair.
“There’s no place to hide,” Forbes warned its readers. “There’s no way to play catch-up to the rising unemployment, plummeting retail sales, the decline of international trade, and the reality of a still quite sick financial system.”
And just then, starting five years ago today, the market began to rally. Then it rallied some more. And some more. Friday’s 16,453 close of the Dow was 150% above the 2009 bottom.
One response to this turn of events is: Go figure. A better one is: Don’t bet against America.
The nation has seen many moments of despair. Usually they are precursors of better days.
In the early 1980s, America was in a deep recession following a decade of economic and stockmarket stagnation. It was soon to be, in Ronald Reagan’s words, “morning in America.”
In the early 1990s, things looked so bad that two Pulitzer Prize-winning authors penned a book titled America: What Went Wrong? The next eight years would be among the most prosperous in American history.
For the most part, these im- pressive rebounds are testament to the enduring strength of free enterprise and American innovation. But some of the rises, as well as some of the falls, had roots in government policy.
The stock market crash of 1929, for example, was a much smaller event, affecting many fewer people than the last decade’s housing bust. And yet it led to depression when the Federal Reserve declined to be the lender of last resort, and Congress and President Herbert Hoover obsessed over the deficit and gold standard.
Similarly, the two-decade economic boom during and after World War II was, in part, the result of a massive investment in manufacturing to win the war and rebuild Europe afterward, and to the brilliant decision to send millions of veterans to college on the GI Bill.
When economic historians look back at the last five years, they will focus first on extraordinary actions taken by the Fed, Congress and Bush administration in 2008 to avert catastrophe. Had they not acted so aggressively — and in ways that were highly unpopular — the nation would not be looking at stock market highs now. It would be trying to dig itself out of a depression.
Policymakers didn’t get everything right. Arguably, for example, they shouldn’t have let Lehman Bros. collapse. It’s also true that the bull market’s gains have not been equally distributed. For the nearly half of Americans who own no stocks, Wall Street’s rally is of little comfort in a stilltight job market.
For those who do own stocks, the standard prospectus warning — past performance is no guarantee of future returns — remains relevant. How long will this bull market go on? The only honest answer is: Who knows?
All sorts of landmines loom, from rising interest rates to international conflicts. For investors who take the long view, however, a reasonable conclusion is that selling the U.S. short can be hazardous to your financial health.