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Not So Different

Jonathan Clements

THE ECONOMY IS recovering and the stock market has recovered. The pandemic isn’t over, but it seems we’re past the worst, at least in the U.S. Feeling better? Take a deep breath, take a step back—and think about the past two decades.

Since early 2000, we’ve had three major stock market declines, or roughly one every decade:

  • In 2000-02, the S&P 500 tumbled 49%, excluding dividends. The first leg down was triggered by the bursting of the dot-com bubble. The second leg down was driven by the Sept. 11 terrorist attacks and the 3,000 who died that day. The result wasn’t just a brief hit to the economy and U.S. military action in both Afghanistan and Iraq, but also a profound blow to the national psyche. Remember folks buying gas masks, stockpiling food and worrying about anthrax-laced letters? It was a phrase heard over and over: “The world will never be the same again.”
  • The S&P 500’s 57% decline in 2007-09 was all about the economy, starting with the real estate market but eventually sending shock waves throughout the business world, toppling major Wall Street firms along the way. Everyday Americans may not have been fearful for their lives, as they were in 2001 and the years that immediately followed, but there was widespread fear that we would see a meltdown of the entire financial system.
  • The S&P 500’s 34% drop in early 2020 was, of course, all about COVID-19 and the resulting shutdown of the global economy. Many lost their lives, while those who lived saw their daily routine upended. Few of us had ever experienced anything like it.

Why do I recount this disturbing history? Each time, experts and everyday investors cried, “It’s different this time.” Yes, each of these three crises were indeed different. If they had been carbon copies of earlier market panics, investors would have spotted the similarities and responded far more calmly.

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“History doesn’t repeat, but it rhymes,” or so goes the saying, which—it seems—wasn’t said by Mark Twain. When the stock market next plunges, it won’t be the same as 2000-02, or 2007-09, or early 2020. But it’ll have similarities: the panicked investors, the widespread fear that the decline will only get worse, the declarations that this market crash is somehow different from all earlier market crashes, and that stocks won’t recover any time soon. Which, needless to say, is about the time when stocks do indeed defy the naysayers and head higher.

To survive a stock market crash, you don’t need a brilliant investment mind. Instead, all that’s required are tenacity, an awareness of market history and enough cash to cover upcoming expenses, so you aren’t forced to sell stocks at the worst possible time.

As I’ve mentioned before, the stock market represents an asymmetrical bet. If all goes well, stocks will fare just fine over the long run. What if economic apocalypse finally arrives? It won’t matter what investments you own. If the globe is reduced to an economic wasteland, nobody’s going to swap their canned goods for your gold bullion, and they certainly won’t barter food for your cryptocurrency or nonfungible tokens.

But I also believe there’s scant chance we’ll ever see that sort of worldwide economic meltdown. Think about the remarkable response to the pandemic—how rapidly governments responded, how quickly businesses adapted, how fast we developed vaccines. This astonishing ability to change and innovate, with an eye to making sure tomorrow is better than today, is what keeps the economy growing—and it’s why we shouldn’t assume the next crisis will be anything more than a painful, but relatively brief, moment in time.

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.

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Roboticus Aquarius
Roboticus Aquarius
4 months ago

Actually, of all of these events, only 2008 really scared me. CDO’s and the like were having a domino effect, blasting holes in the balance sheets of hundreds of companies and even sovereign wealth funds. I was very worried about the economy essentially freezing up. I think the Fed did far more than we’ll ever know to manage that effectively… in addition to their critical market clearing function.

I’m not trying to shrug off the other events, but for me they weren’t frightening.

holylandphotos
holylandphotos
4 months ago

Thank you for the important reminders! What concerns me is that all this is based upon a foundation of laws (and their enforcement) based upon the ‘sanctity of Private Property Rights‘ (an observation of Ken Fisher). I wonder if those basic rights (laws) are now under assault?

Gozo Rabat
Gozo Rabat
4 months ago

Mr. Clements, your optimism in terms of a total/global collapse is admirable.

In contrast, the way our household has looked at this current pandemic, we consider it a near-miracle that we never lost food, utilities, nor Internet. (Well, not true: here in Texas, we had it pretty rough in these regards in early February—but even then, only for about a week.)

I’m continually amazed, now over the course of some thirty-or-forty-odd years, how you keep coming up with engaging financial thoughts to share, on such a regular basis.

Regards,
(($; -)}™
Gozo

medhat
medhat
4 months ago

Thank you for the reality check Jon, I had simply forgotten the magnitude of the “crashes” of 2000 and 2009, and you put them in eye-popping detail. So long as there’s a sliver of trust in our economic system, however challenged at times, I think recovery will continue to be the rule, and not an exception.

Nate Allen
Nate Allen
4 months ago

What about if something akin to what Ray Dalio has been predicting in “The Changing World Order” were to come about? He talks about the 7 or 8 cycles we have globally seen before that average around 250 years (give it take 150 years) and the US seems to be at the end of one now.

The commonalities between now and the previous cycles with other powers seems to be: 1) high levels of indebtedness and extremely low interest rates, which limits central banks’ (or other regulating authority) powers to stimulate the economy, 2) large wealth gaps and political divisions within countries, which leads to increased social and political conflicts, and 3) a rising world power challenging the overextended existing world power, which causes external conflict.

The consequences of such a transition seem especially dire.

Joe Kesler
Joe Kesler
4 months ago
Reply to  Nate Allen

Nate, Before taking too much action based on Ray’s predictions you might want to look at his track record. He’s made some predictions that might give you pause before you make investment decisions based on what he is predicting now.

Google him and I think you’ll find articles that discuss some of his big misses. It will give you perspective to decide if you want to make decisions based on what he is saying today.

He’s certainly been very successful in his hedge fund. So I can understand why it’s tempting to listen to him. My advice. Just be aware of his record before you make any moves. Good luck!

Nate Allen
Nate Allen
4 months ago
Reply to  Joe Kesler

Joe, thanks for the references.

In reality, I don’t necessarily think Ray is on point. I was just trying to give one possibility of when “next time” comes for a bear market, the market might not recover again as is laid out in the article by Jonathan. I don’t actually think the chances are extremely high of it happening.

There are other possibilities, of course, where the “next time” might be different and not have a recovery. (If the super volcano under Yellowstone were to erupt again and take out 3/4 of the US, for instance)

Last edited 4 months ago by Nate Allen
dl777
dl777
4 months ago
Reply to  Nate Allen

Interesting observation Nate. What would be your plan for investing if one were just entering retirement?

Nate Allen
Nate Allen
4 months ago
Reply to  dl777

Ray advocates investing in China and says most people are underinvested there. It depends on how likely you believe his argument to be, I suppose. There are many more facets to it than what I stated above. I’d find some videos of Ray Dalio talking about it or read some of the articles he has written on “The Changing World Order”.

Being a hedge fund manager (of the world’s largest hedge fund) he talks in terms of financial and investing implications, but you can surmise the social consequences about what he is discussing.

David Powell
David Powell
4 months ago
Reply to  Nate Allen

Ray’s brilliant to be sure. For any forecast to be useful it has to be right on substance and timing. The timing bit can be tricky. If that scenario plays out in 40 years it may not matter.

Last edited 4 months ago by David Powell
Guest
Guest
4 months ago
Reply to  Nate Allen

Yes Ray says most people are underinvested in China but that only means most Americans love to have US-centric investments and are, therefore, missing out on a significant, and growing (over the coming decades, not the next 2-3 years), global growth opportunities. So, sure, I invest in China via a diversified emerging markets fund, but any sort of overweight in that capitalist/communist country that still maintains too much control over businesses there (see Jack Ma and Ant), no thanks.

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