The Great Recession - December 2007-2009
Who would like to forget this period of time in investing? A global financial crisis was triggered by a downturn in U.S. housing prices with a bear market that saw the S&P 500 down 57%. At the time, it was the “worst economic downturn since the recession of 1937-38.” (Investopedia) This was the period of ruthless mortgage underwriting and mortgage backed securities marketing. Even the oil industry felt the bear market pain with it crashing during this period (see chart below)
Robert Rich of the Federal Reserve Bank of Cleveland writes (regarding this period):
“The Great Recession began in December 2007 and ended in June 2009, which makes it the longest recession since World War II. Beyond its duration, the Great Recession was notably severe in several respects. Real gross domestic product (GDP) fell 4.3 percent from its peak in 2007Q4 to its trough in 2009Q2, the largest decline in the postwar era (based on data as of October 2013). The unemployment rate, which was 5 percent in December 2007, rose to 9.5 percent in June 2009, and peaked at 10 percent in October 2009. The financial effects of the Great Recession were similarly outsized: Home prices fell approximately 30 percent, on average, from their mid-2006 peak to mid-2009, while the S&P 500 index fell 57 percent from its October 2007 peak to its trough in March 2009. The net worth of US households and nonprofit organizations fell from a peak of approximately $69 trillion in 2007 to a trough of $55 trillion in 2009. As the financial crisis and recession deepened, measures intended to revive economic growth were implemented on a global basis. The United States, like many other nations, enacted fiscal stimulus programs that used different combinations of government spending and tax cuts. These programs included the Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009.”
Stay the Course
The investor who stayed the course and focused on the long-term was rewarded. According to Officialdata.org: “If you invested $100 in the S&P 500 at the beginning of 2007, you would have about $246.20 at the end of 2017, assuming you reinvested all dividends. This is a return on investment of 146.20%, or 8.54% per year. If you used dollar-cost averaging (monthly) instead of a lump-sum investment, you'd have $261.07. This investment result beats inflation during this period for an inflation-adjusted return of about 108.26% cumulatively, or 6.90% per year.
As always, the financial media drives fear during these periods of time.
The Lesson - the same as Part 1
- It’s difficult to predict the future. It’s next to impossible to determine what the market returns will be going forward due to some terrible news event.
- Fear drives bad decision making when it comes to investing.
- Investors, because they are human, have short-term memories causing them to react in the moment.