Economic Perspective – January 4, 2010

01 CRW_6933 By J. David Lewis

It is a New Year and amazing how moods can change as we started the first week after the break between Christmas and New Year.  At least once, I vowed that I would go somewhere next year.  Then, on the first Sunday of 2010, as our church service started, I suddenly felt ready to dive into the year.  We hope you see the New Year with similar anticipation.  

For a few years, I have been remembering a speech at a continuing education event around 1998 or 1999.   There, near the time Allen Greenspan used the term “irrational exuberance,” this speaker made his case very clearly, using the broadest span of reliable stock market data available.  He reminded us of something many of us did not want to acknowledge while the “Tech Bubble” was in full force.  He used another term, “regression to the mean.” It basically says; there are forces at work that will push returns for securities back toward their “normal” trend line whenever they stray too far above or below it.  Most of us had studied the economic theory, based on complex math, which purports to explain this “regression to the mean” for many kinds of securities.  This speaker was telling us to adjust our expectations for the future.  I think it dampened my enthusiasm after hearing him.  At least, I hope it did. 

At the time, the biggest fear many people had was that all our electronic gizmos would stop functioning when the year stated with “20” instead of “19.”  Remember that?  Instead, the world figured out that there really was irrational exuberance for those tech companies.  It took until mid-year 2001 to begin sorting out the way to recovery.  Then, 9/11 extended that bear market.  Those brutally negative three years were followed by five reasonably good years, which paved the way for many people to do some very dumb things.  Yes, the people making those loans were completely irresponsible.  Mortgaging the home for vacation money wasn’t particularly bright either.  It seems everyone contributed.  So far, this time we have only one negative calendar year, 2008.  The S&P 500 Index return for 2009 was +26.46% with dividends reinvested. 

So, now we have a decade that is widely described as “lost,” with ten years measured from a time when stocks were clearly overvalued.  A question at the beginning 2010 is whether stock returns have been below the trend line long enough to make another growth period as likely as the collapse was in 2000.  In 2012 and 2013, the ten-year return will be measured from near the bottom of the market after 9/11.  If overall stock market values stay essentially where they are now, that ten-year return can look quite respectable.  If stock prices increase, that ten years can look remarkable.  Or, there can be another event as devastating as 9/11 or sub-prime mortgages. We simply cannot know the future in January 2010.  

Instead of thinking about ten years and stock returns, we have been reporting changes in client net worth since 2003.  That was a time when we were about where we seem to be now in an economic recovery.  This measure is broader than portfolio performance, to reflect our clients’ overall wealth.  It includes debt and asset increases or reductions.  Clients are also receiving graphs of total assets and total liabilities for the range of meaningful data in our records.  The patterns these graphs reveal are much more important than starting with a clearly overvalued date.  These are more meaningful measures of financial progress than portfolio performance or comparing two dates just because they both end with zeros.  We think seeing this kind of information helps people build and enjoy their wealth, with much less fear than one might otherwise have.  We think our clients weathered the 2007 peak through 2009 emotionally better than most people.

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