It’s amazing how fast a stock market crisis can arise. In mid-July 2011, everything seemed to be going along just fine. The economy was slowly expanding. The stock market was doing reasonably well. In general, there was a sense that things were on the mend after the terrible economic mess of 2008. But in three short weeks, we have gone from one end of the spectrum to the other.
A protracted, political train wreck
What caused this? Certainly the protracted, and as yet unresolved, political train wreck that was our debt ceiling and deficit reduction debate, the European bank situation and, to a lesser degree, recent data showing the economic recovery is slowing have knocked financial markets on their ears.
In early to mid-July, there were reports that the debt ceiling debate had taken us very close to a mega-deal. Something like $4 trillion in cuts and tax increases would occur. But the deal did not happen and the markets reacted negatively. I really think that if that deal had been done the message would have been that America is serious about getting its financial act together and the markets would have advanced. Instead, the message was that we’re more interested in pushing the issue down the road and, wham, the market reaction was severe. Add in today’s instant media where everything is hyped, everything is magnified and, voila, you have a crisis.
2008 all over again?
The first thing that comes to mind for many of my clients is whether this is 2008 all over again. A case could be made for answering both yes and no.
- On the “no, it’s different” side, our banking system appears to be in far better condition now than then. There is far less leverage in the system, corporate America seems stronger than in many years, and why wouldn’t it be, having reduced its work force and, in many cases, accumulating huge amounts of cash and turning handsome profits even in a weakened economy.
- On the “yes” side, it’s possible that the European situation and our own inability to make meaningful progress on our deficit could knock consumer and business spending down to the point where another recession is possible.
Where do we go from here?
I think it will take a couple of things to get through this …
- Tackle the deficit. We as a country really have to make progress on our deficit. So far, our politicians have shown, in my opinion, an incredible lack of responsibility in doing so. They seem perfectly willing to sacrifice what’s good for the country in order to advance their political agendas. One of the basic tenants of a democracy is that compromise is essential. Our political process has been hijacked by folks who view any compromise as a failure rather than part of the process. Regardless of your political views, it seems to me that any reasonable person would see compromise as the path forward, not as a sellout of one’s beliefs. We all remember the stories about how Ronald Reagan and Tip O’Neill would publicly be at each other’s throats, but at the end of the day they’d each give up things from their wish list, get together and move the country forward. That’s not happening today. The philosophical rigidity that many politicians hold is the reason why.
- See Europe handle its debt problems. The other thing that needs to happen is for Europe to get a handle on its sovereign debt issues. The most powerful countries in the European Union have been reluctant to do that because, as in our own country, doing so involves political pain. But there are finally signs that this process is starting. When financial markets see that both America and Europe are serious about making meaningful progress on these issues I think the fear that is prevalent now will ease. That in turn should mean that markets will right themselves.
Decide based upon what we can know
What to do? Depends on your situation and your level of concern. If you’re a client, you’ve heard me say many times that I like to make decisions based on what I know, not on what I think may or may not happen. I don’t know when markets will go up or down. I don’t know what interest rates will do, if gold will continue to climb in price or what the Fed may do. I don’t know when the economy will go into expansion or recession. Nobody can accurately predict these things.
I do know how to talk with clients about their situations, their risk tolerance levels, their past investing experience and their feelings about investing. I know how to build balanced portfolios that are appropriate for each client and how to choose good firms to manage those portfolios. I know how to generate income from portfolios. Working with clients, I know how to make decisions based on logic and a good back-and-forth discussion of options.
Call me. Let’s talk.