This past week marks 15 years since the stock market bottomed during the Global Financial Crisis. Time has certainly helped to erase some, if not most, of the trauma.
Thinking back on it, I find it incredibly difficult to put into words the oppressive sense of pessimism that pressured perfectly rational people to make incredibly irrational decisions.
At its nadir on March 9, 2009, the S&P 500 Index closed a mind-piercing 56.8% below its record high on October 9, 2007. For eighteen solid months we endured negative headlines, dropping account values, and cataclysmic predictions.
Pessimism did not cease on March 9, 2009, but the inception of the faintest bit of optimism gave traders a slim glimmer of hope the next day.
There was absolutely nothing in the headlines to indicate that the uptick on March 10, 2009, would be any more sustainable than the numerous bear market rallies that had been quickly exterminated over the last 18 months. Much to its surprise, this particular glimmer turned out to be the real inflection point.
The S&P 500 closed at 676.53 on March 9, 2009. Eight years later it closed at 2,364.87. On Friday, March 8, 2024, it closed at 5,123.69. Time heals market wounds.
This healing did not come without additional challenges. Over the last 15 years we witnessed a global pandemic during which governments crippled economic activity, conflicts around the globe, a burst of inflation, record-breaking Federal Reserve rate hikes, and hyper-partisan bickering. And that is just the last four years.
The lesson that history consistently teaches us is that the stock market cannot and should not be trusted or timed in the short-term. Traders irrationally drive stock prices far above or below companies’ true value in unpredictable waves of greed and fear.
However, when given enough time and with enough patience, owning companies’ stock can be a vital piece of your long-term financial plan that fuels real (above inflation) future returns.
Given the current upward trend in the stock market, we know that one day there will be a tiny, almost unnoticed, glimmer of pessimism. One of those glimmers, much to its surprise, will turn out to be an inflection point that will eventually develop into our next bear market.
Obsessing about short-term future market directions can bring on a case of glimmer paranoia. You never know when the next pullback or uptick is the innocent first step of something bigger. Your time would be much better spent obsessing over selecting an investment risk budget that is appropriate for your financial plan before the start of anything big.
Calm confidence built on your personal written investment plan puts time, patience, and a healthy dose of long-term logic on your side.
Fifteen years seems like a long time to learn a lesson, but time has taught us well.
Quote of the week: Mannie Friedman: “When the market wants to bet that the world is coming to an end, the safe bet is to take the other side and bet the world won’t come to an end. After all, what have you got to lose?”