By the first half of 2011, after a post-crash jump in investment prices, many disciplined investors felt a material level of financial and emotional recovery from the 2007-2009 credit crisis market. The third quarter of 2011, however, was a reminder that the bumpy road to full recovery is not yet over, as the world slipped on Greece. What do countries like Greece and babies have in common? Both are small but can periodically be the tail that wags the dog. Also see how historical commentary in the press parallels recent market mis-reads.
The third quarter’s turbulence was driven, in great part, by the ongoing Greek financial crisis, at a time when the markets were already nervous about the slow pace of the global economic recovery. It is surprising that Greece, with a population of only 10 million, could have such a large impact on world markets.
However, if you have children or have taken care of a baby, it is easy to imagine how something so small can dominate your focus and periodically cause so much parental debate. In this case (and this may make you feel slightly better about the U.S. Congress), there are 17 parents, i.e. Euroland governments. All of the “parents” want the “child” to succeed as well as learn a lesson by not being let off too easily. However, none of them can agree on who should babysit or how much to pay for the child’s speeding tickets. Indecision increases uncertainty, which markets dislike.
News headlines often mirror the markets concerns:
- “The stock market has scarcely been so shaky since 1929. Just about everyone who sells, borrows or invests has that overall feeling of unease.”
- “Banks and insurance companies are tottering beneath huge portfolios of bad real estate mortgages.”
- “All sorts of people who never thought they’d be on the jobless lines…are looking for jobs and not finding them.”
These Time Magazine snippets aptly capture common concerns and uncertainty regarding our current environment, and suggest that “it’s different this time.” However, these quotes are not from recent years. Rather, they are from January 1976, October 1990, and January 2004, respectively.
When each of these headlines ran, the Dow-Jones Industrial Average was under 3,000. The Dow today is well over 11,000, and is up approximately 80% from the March 2009 market low, despite the bumps during the most recent quarter.
Are things different this time? Yes and no. Yes, in that no two economic environments are exactly the same. No, in that today’s environment falls in the category of “recovery from a major financial crisis,” which typically last five to seven years. We’re now at the four-year mark.
It’s hard to ignore the headlines during any challenging period, but history shows that it pays to be a disciplined, non-emotional investor, focused on the long-term. During such times, it is easier to remain calm if you focus on your goals, rather than on short-term market setbacks.
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