A HISTORY OF CRISES PAST: What we've learned
Updated: Jun 13
Spring 2021 Newsletter
In our last newsletter, we discussed the
“Teachable Moment” that the 2020 COVID- 19 Crisis provided to investors. Truly teachable moments do not come along very often – only once every decade or so. Sadly, in our eagerness to push crisis events into the deep recesses of our brain, we often fail to learn from the experience. We then become prone to falling victim to our own emotions when the next crisis comes along.
The COVID-19 crisis has unquestionably been a gut-wrenching experience on both an economic and societal level. However, it represents only the latest in a long line of financial crises that we have confronted over the decades. At the time they were happening, each one of these events presented a real threat to our long-term financial security and independence. After all, that is what led them to be called a “crisis” in the first place. Each of them caused millions of investors to second guess the viability of their financial plans. They also had one other common characteristic – they were ALL temporary. Nothing other than time, patience and perseverance was required to escape each crisis undamaged. I thought it would be helpful to provide a recap of other crises or severe recessions that have come and gone over the past few decades in hopes that we could learn from those experiences as well. Note that all equity market data used will reflect the broad- based US market as measured by the S&P500 Index. Given the tight integration between Canadian and US economies, Canadian equity market movements are generally very similar to those of the US.
Great Market Crash of 1987
Emerging from two back-to-back recessions in the early 1980’s, broad based equity markets appreciated significantly between 1982-1987. However, in August of 1987 concerns started to brew. Increased tensions in the Persian Gulf led to fears of a repeat of the oil crisis experienced in the late 1970’s. Concerns about the possibility of higher interest rates reminiscent of those experienced in the earlier part of the decade also emerged. In late August, equity markets started to drift lower on these and other worries. The most memorable event occurred on October 19th when the S&P500 Index dropped just over 20% in one single trading day. In what later became dubbed as “Black Monday,” it still represents the largest one-day percentage decline in US history. While the causes of the crash are still debated, most experts point to a combination of computerized trading based on predetermined guidelines and outright emotional panic from investors. Between August 25th - December 24th, the S&P500 experienced a peak to trough decline of ~34%. S&P500 Index Close on December 24, 1987 – 252.03*
Tech Bubble Crash - 9/11 (2001-2002)
In the 1990’s the world witnessed the rapid development of a global computer network (The Internet) which was destined to revolutionize the world of communication and information sharing. Toward the latter part of the decade, excessive speculation on the part of institutional and individual investors alike drove share prices of most internet related companies to nosebleed valuations. In some cases, companies with minimal revenue, zero profitability and consisting of little more than an interesting “idea” saw their share prices soar. The frenzy was fed even further as the year 2000 approached with fear mongering about the ability of computers to continue to function when we rolled into a new millennium. When the year 2000 arrived with only minimal disruptions, the world breathed a sigh of relief. Then, only a few months later in March of 2000, reality set in and share prices of virtually all technology or internet related companies started a precipitous decline that saw the technology heavy NASDAQ Index decline by roughly 78% from its peak. Broad-based equity markets also drifted modestly lower in the ensuing months. Then, the devastating September 11th, 2001 US terrorist attacks exacerbated the downturn and broad-based equity markets declined significantly. The S&P500 Index dropped 49% in the 30-month period between March 24, 2000 - October 9, 2002. S&P500 Index Close on October 9, 2002 - 776.76*
Global Financial Crisis (2007-2009)
Still well entrenched into the memories of most investors, the global financial crisis stemmed from a variety of factors with the biggest being speculative activity in real estate prices in both Western Europe and the United States. In what was essentially a one-way bet on continually rising real estate prices, enormous amounts of money were borrowed by speculative investors to invest in real estate properties. Poor financial regulation allowed huge numbers of investors to access credit when they could ill afford to carry the properties outside of a best-case scenario. Brokerage houses subsequently bundled these “sub-prime” mortgages into packages and resold them to other financial institutions. When inflationary pressures increased the cost of carrying the debt, defaults on mortgages followed. Speculative real estate investors, now unable to make their mortgage payments, were either forced to sell the properties OR were foreclosed on. Major financial institutions like Lehman Brothers went bankrupt while AIG and other companies like General Motors were bailed out by governments. A severe economic recession ensued. The S&P500 experienced a peak-to-trough decline of 57% between October 9th, 2007 - March 9, 2009. S&P500 Index Close on March 9, 2009 – 676.53*
The above crises are only a few of the many that have occurred in the past 35 years. I have cherry-picked only those that resulted in declines on the S&P500 of 30% or more. There are many others of lesser severity. Honourable mention goes to the Asian Financial Crisis (1997), the US Debt Ceiling Crisis and European Sovereign Debt Crisis (2011), the Chinese Stock Market Crash (2015), and the US Trade War with China (2018). Few investors even remember these which, while deemed to be a major events at the time, quickly disappeared.
With the frequency of crises of one magnitude or another, it would make one wonder how the world has managed to move forward and how broad-based equity prices have continued to advance. The answer is really quite simple - human ingenuity and human innovation.
One last thing. As of the day of this writing, the S&P500 Index is currently at 3,943. Now, go back and look where it was at the end of each of the above listed crises. Finally, take
the current level of the S&P500 and divide it by the level at the end of your chosen crisis
“event.” The answer will tell you how many times over the value of broad-based equities has grown since then (and of course, this excludes all dividends paid to investors in the interim).
Please reach out if you have any questions.
*All S&P500 data obtained from Yahoo Finance