History teaches us valuable lessons about market corrections

Though the current drop hurts, better things usually lie ahead if we look to the bigger picture

One of the great lessons of history is the story of the Viking settlements in Greenland.

As stock markets wobble and the economic outlook looks shaky, it still resonates, because the story illustrates how hard it can be to keep perspective as events unfold around you.

There was a period of global warming that began about 950 AD, often called the Long Summer, and lasted until 1300. Eric the Red, banished from Norway, settled in Greenland bringing his horses, pigs and cattle, as well as all the frames of reference and attitudes of Scandinavia.

Other settlers followed. The Vikings didn’t realize that the grassy meadows along the coast took hundreds of years to grow. Or that the warmer weather that melted the ice in the spring when they needed fish to survive was temporary. Their animals ate the grass at a faster rate than it grew. They had to go farther to find grazing. When the ice didn’t melt in the spring, they couldn’t launch boats to fish.

The weather gradually became colder and the colonies hung on for a few hundred years and then collapsed. Archeologists have found the bones of horses barely the size of large dogs.

As stock markets continued to sell off today, readers rightly wonder whether things will get worse, or whether this is a short, sharp correction. Many also wonder whether the dollar will continue to fall and how far it will go. What does this all mean for interest rates? All three are interrelated. A year ago the dollar was above 90 cents (U.S.) and flirted with par in 2011. A dollar above 90 cents for four years was the equivalent of the Viking long summer.

It fell slowly until the end of June when it was above 81 cents, which is spot-on the 20-year average of 81.46 cents, according to canadianforex.ca website.

The dollar fell to 75.54 cents, at the open Monday, down 0.40 of a cent from Friday. One American dollar costs $1.32 (Canadian).

When it comes to interest rates, prime at 2.7 per cent isn’t the historic norm either. The average over 60 years is 7.56 per cent.

Today’s rates are so abnormally low that the incentive to get a higher return from dividends has sent a lot of money into stocks.

So Canadian and U.S. markets have been on an almost uninterrupted tear since 2009. For U.S. stocks, the rally began in May 2009 and continued through July, making it the third-longest bull market on record. (The longest ran between December 1987 and March 2000, to be followed by the dot.com bust and the Sept. 11, 2001terror attacks.)

Here at home, the average length of an uninterrupted market rise is about 48 months, or four years. Through early summer it had been 72 months, or six years. Between January 2009 and this week, the main Toronto stock index rose 55 per cent. This includes the recent retreat. It helped our pension plans recover, padded our investment returns and made us feel wealthier. The current focus has been on China. The stock market is not the real economy anywhere, and particularly not in China. There, markets have been a casino where — after the privations of Communism — small players could dream of easy money playing the capitalist game. But that’s gambling, based on tips and hopes, rather than investing, which is based on the fundamentals of China’s growth.

Much of what China produces is sold abroad, not purchased domestically, so a lot of what happens on the Shanghai market stays there. So here’s the bright side. á Friday, the U.S. reported an uptick in inflation for the sixth month. It means their economy has gained traction. Wages and consumption are rising. All good news, because it means the world’s biggest and most resilient economy, and our biggest trading partner, is gathering momentum.

Britain has overtaken France as Europe’s second-largest economy. On Monday its largest employer group, the Confederation of British Industry (CBI), increased its estimates for growth over the next two years as investment and strong consumer spending accelerate. Britain is our third-largest trading partner, tied with Mexico. More good news.

This may be a correction or something worse. And there’s no question demand for oil and mineral resources are hurting. But stock markets, like housing markets, boom and bust. The busts set the stage for another boom. And with rates so low, this may have been an interruption in another upward leg.

That’s not to say it doesn’t hurt, and many people will toss their August investment statements into drawers, unopened. But better things normally lie ahead.

It pays to keep that bigger picture in mind, something the Vikings didn’t do, paying the ultimate price as a result. Adam Mayers writes about investing and personal finance on Tuesdays and Thursdays. Have a question? Reach him at