The Big Picture
“The parties were bigger. The pace was faster. The shows were broader. The buildings were higher. The morals were looser. And the liquor was cheaper.” – F. Scott Fitzgerald
There is likely no greater known author from the 1920s than F. Scott Fitzgerald. At the ending of the first World War began a decade of economic prosperity, cultural and social advancement, and great excesses. The 1920s brought Babe Ruth, Charles Lindbergh and the Spirit of St. Louis, Prohibition and Al Capone, even Mickey Mouse, and ended with the most spectacular market crash in history in 1929!
“Stock prices have reached what appears to be a permanently high plateau.” – Irving Fisher, just a week before the market crash in 29′.
Famous last words. These absolute statements do not age well.
Some more recent comments:
“The U.S. economy is structurally less recession-prone today.” Followed by “a downturn is unlikely over the next several years.” – Goldman Sachs, January 2020!
Very similar comments made almost a century later. Human behavior doesn’t change! I drafted this post in early February, just days before the market began to turned on the news of the virus. Needless to say, some adjustments had to be made. As we enter this new decade of 20’s, this is likely not the roar that many were hoping for.
Have a Plan and a Process!
From the Trenches
“The roaring twenties were the period of Great American Prosperity that was built on shaky foundations.” -Paul Getty
The 1920’s were a period of material shifts in the economic landscape. As consumer tastes changed, the economy responded. Consumerism was on the rise as mass production made acquiring goods easier and cheaper. Advertising spending rose significantly to fuel the demand. Buying on credit gained popularity among the middle class and debt rose substantially. History doesn’t repeat but it surely rhymes!
The 1929 stock market crash was the unwinding of the many imbalances allowed to go unchecked during that decade. I would equate that event to the unwinding of the real estate bubble and great financial crisis in 2008. The foundations which these periods were built on were not sound.
As time passes, economic studies on this past decade will focus on the extent of government interventions and its impact on the economy and markets. Initially, these interventions were met to stem the damage from the financial crisis. The problem is these programs never stopped once begun!
S&P 500 2010-2020 & the many Stimulus Programs enacted to remedy the 2008 financial crisis.
QE, or quantitative easing, which in English simply means the Federal Reserve (Fed) buying assets from banks (orange shaded). OT, or Operation Twist, which was an attempt by the Fed to manipulate the interest rate curve (blue shaded). The election of the current administration (tax-cuts and pro-business policies) buffeted by international stimulus programs (yellow shaded). And lastly, “Non-QE” which is the Fed’s latest program of asset buying with the caveat that “it isn’t QE this time” (orange shaded far right).
When they continue to tell you it isn’t a duck, even though it looks like a duck and walks like one too…
The interesting point in the above chart is the periods of time not highlighted the market experienced material corrections and increased volatility (indicated with red arrows). The red shaded area is the period in 2018 when the Fed attempted to cease all stimulus actions as well as tighten monetary conditions. This culminated in the largest correction in over 7 years at the end of 2018.
Today, due to the impact of the coronavirus on the global economy, we are seeing a whole new level of stimulus actions. More to come on this critical topic.
Bottom Line: Have we entered a period where the government and central banks will be a permanent presence in the financial markets? At present, it certainly appears so. Is this a positive factor for the future? I would not recommend being too quick with conclusions.
“There are only the pursued, the pursuing, the busy, and the tired.” F. Scott Fitzgerald from The Great Gatsby
Over ten years ago I wrote about bubbles and the policies that have led to the “bubble era”. Bubbles are nothing new, however we seem to be in a time when just as one bubble bursts another rises to replace the last. The below chart we can see that bubbles of the past pale in comparison to the “Disruptors” bubble. (Bitcoin wasn’t included which makes the Disruptors look like a mole hill in front of a mountain!) The Disruptors are primarily made up of internet commerce companies as well as the FAANG stocks which include Facebook, Amazon, Apple, Netfix, Google, etc.
Over a decade long bull run has enabled certain sectors and issues to rise well beyond any reasonable assessment of value. These issues will surely be tested during this bear. It is critical to be cognizant of the risks that are present and have process for managing them. While these scenarios may be great fun on the way up, they are devastating when they ultimately reverse.
Bottom Line: History rhymes. Some things are always the same. If anything was learned from the past, the end result of a bubble is never different.
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