September 12, 2013

Ideas to keep and discard five years after Lehman


Wow! It's been five years now since the bankruptcy of Lehman Brothers. The term since Lehman is ubiquitous. It has become a signature expression, even an infamous one. During that turbulent time, the fall of 2008, other banks fell, insurance companies collapsed and the solvency of money market funds and credit markets were called into question. Trade collapsed, the system seemed to freeze.

It was not just about Lehman. But the name "Lehman Brothers” has now become synonymous with the onset of the last recession, one of the worst since the Great Depression. Our last recession, “The Great Recession,” was severe, and because of the importance of the United States in the global economy, problems spread well beyond American borders, disrupting both emerging markets and the world’s other major economies. So, with the fifth anniversary coming up, it’s a good time to reflect on the crisis and offer some thoughts on its implications going forward.

Ideas to keep
  • No matter how bad it gets, don’t believe the doomsters. The stock market appeared ready to fall to zero in March 2009. Things were bad for sure. By then, just about everyone had decided to buy bonds and throw out stocks. But behind the scenes, things were already starting to take a turn for the better. It is interesting to note that those who ran to bonds, forsaking stocks, would have gained everything back had they held on, as US markets climbed by about 120% over the next four years.
  • Don’t get emotional. Cycles are cycles; they have not been abolished. Staying glued to the television or watching the tape during a downturn is like watching a train wreck replay. It does not help. The same will be true in the next euphoric phase, so don't get emotional on the upside either. It is best to keep emotions out of investing.
  • The business cycle matters. There are bear markets and there are bull markets, but we do know that recessions, the down cycles, create the worst market downdrafts and also set investors up for the best opportunities. This has happened repeatedly throughout our history. Static portfolios don’t account for this. Be a student of the cycle; study what drives them. Look at corporate profits (a big part of the US comeback). Look at price affordability (US houses and cars became more affordable). Look at the cost of capital (interest rates and ease of borrowing). Look at where spending power of the U.S. consumer is coming from. From 2008 to 2013, it came from two places: 1) longer work weeks and 2) less debt repayment.

Ideas to discard
  • Ideology matters to investors. A lot of investors would not put money back into the market after 2008 because there was "too much debt out there.” That sounded right, but no one knows how much debt is too much, and the idea that the United States is like a household that borrows too much and faces bankruptcy is not true. The country has a central bank that lets it print its own money, something no household can do. Furthermore, in the past The US and other countries got away with a lot more debt than is on the books now.
  • Politics matters to investing. I will concede that government is now a bigger player in the business cycle, in the lives of citizens and in the day-to-day life of business owners. But it is not as simple as "government should stay out" or "government has to do much more." The whole picture is much more complicated and nuanced than one of pure political ideology. Fixed ideology is fun for cocktail parties, but gets in the way of smart investment thinking. Take off your political buttons and party affiliation hats when you click on your investment site.
  • Bonds are best, forget the rest. Investors who fell in love with bonds are now regretting it, as rates begin to step up and bond prices erode. Bonds have to be actively managed. They are great for income, great for diversification and great for insurance, but not usually the best investment for a whole basket of money.
  • The blame game: Do you blame the banks, Wall Street or the US government? Does it really matter? Assigning blame is not a good use of time for investors. All of the above had a hand in this one. While the banking system is a weak link, it is also what makes small business thrive and grow. The banks by many measures are better fitted now for the business cycle, and by all accounts they are less likely to drive the system under, as happened in 2008.

Key takeaways

Everyone has had his or her say on the causes of the last crisis. And everyone seems to have an explanation that fits. But we know that stock markets worldwide followed roughly the path of corporate health and recovering growth. Lost fortunes were regained. The world did not end, but we also did not end up in booms such as the ones we saw in the ‘80s and ’90s. Personally, I will take slow, steady growth over booming growth.

The business of capital markets runs in cycles, in part propelled by governments, but ultimately by the human desire to grow and improve. This has happened time and again. Governments try to blunt the fury of the business cycle and make the human costs of these events less horrific, but no single government has figured out how much intervention is too much or too little.

Fundamentals prevail and need to be matched with valuations. That is what the market teaches us. Investors who play the political side, the ideological side or the day-trading side — or let their heart and emotions lead the way — will often get beat up, not just once, but on both ends of the cycle. It seems to me that investors who compare the drivers of progress with the obstacles and decide from there will win out. In the dimming light of September 2013, the fundamentals still point to a lengthening, but moderate cycle, the market is slightly ahead of that reality and the alert investor at this moment goes slow.




No forecasts can be guaranteed.

The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.

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