Financial Security For Dummies. Eric Tyson
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After Nixon resigned and his vice president, Gerald Ford, took over, he ended up losing the next presidential election to Jimmy Carter, who continued many of the same problematic economic policies of the Nixon years.
With rising and stubbornly high inflation, the Federal Reserve finally raised interest rates to double-digit levels to stop the cycle. Those actions, combined with the pro-growth economic policies of President Ronald Reagan, who was elected in 1980, finally ushered in a sustained period of lower inflation, lower interest rates, consistently strong economic growth, lower unemployment, and rising stock prices.
9/11 terrorist attacks and recession
Generally speaking, the 1990s were a good decade for the U.S. economy and financial markets. The economy grew briskly after a brief recession early in the decade, unemployment trended down, and stock prices enjoyed one of the greatest bull runs ever. And this came on the heels of the largely good 1980s.
Interest rates and inflation trended lower, and by the end of the decade, the federal government was actually enjoying a budget surplus — imagine that! A strong economy produced booming tax revenues, and believe it or not, the Congress showed restraint in their spending.
By the late 1990s, however, warning signs began accumulating. Stock prices, especially in the increasingly popular internet and technology sector, reached frothy levels. Companies with no profits and little revenue were going public and being bid up.
In the final 18 months leading up to its peak in early 2000, the tech-heavy Nasdaq index rose more than 300 percent and the price-earnings ratio of the stocks in the index exceeded 100! A book published in 1999, Dow 36,000 by James Glassman and Kevin Hassett (published by Crown Business), said that stocks should overall be triple their then current (inflated) valuations. (These authors might finally be right about the Dow level more than two decades later!)
The rise of cheap online trading lured in novice and naïve investors and also encouraged more frequent trading. This period saw the rise of day traders who jumped in and out of particular stocks, sometimes holding a stock for mere hours. Not surprisingly, studies have found that increased trading leads to reduced returns.
As the dot-com bubble began to unravel and the collapse of internet and technology stock prices and companies began to spill over into the broader economy, a recession began to unfold. And then the 9/11 terrorist attacks happened in late 2001, and that further undermined consumer confidence and the economy. A number of high-profile corporate accounting scandals — for example, Enron and WorldCom — also hit investors and their confidence.
The bear market in the early 2000s was a big one, especially in the technology and internet space. Check out the declines of these U.S. stock market indexes:
Dow Jones Industrial Average: 39 percent
S&P 500: 49 percent
Nasdaq: 78 percent
Dot-com Index: 95 percent
2008 financial crisis
With the United States winning the war on terrorism and companies hiring again and corporate profits snapping back, stock prices rebounded and hit new highs in late 2006 and into 2007. Unfortunately, not many years into its recovery, the economy was about to hit even rougher times and a more severe crisis.
The real estate sector had continued to do well in most parts of the country through the prior recession and in the aftermath of the terror attacks. Lenders were encouraged and incentivized to make loans to increasingly risky borrowers — that is, borrowers with little to no down payment and/or mediocre credit scores and reports. These higher-risk mortgages were known as sub-prime mortgages — sub-prime refers to the borrowers having below prime credit reputations. Despite sub-prime mortgages’ obviously higher risk during a real estate market downturn, major credit rating agencies handed out AAA ratings on these risky securities, which fostered the appetite for them among financial institutions.
Sub-prime mortgages and other real estate–related securities ended up on the balance sheets of important and often highly leveraged financial institutions, including investment banks, commercial banks, insurers, and so on. When real estate prices began falling in many parts of the United States in 2006, 2007, and into 2008, the value of these sub-prime mortgages got crushed, and that dragged down the financial institutions that owned lots of them. This led to bankruptcies (such as American Home Mortgage, IndyMac, Lehman Brothers, and New Century) and the merger of failing firms into stronger firms (for example, Countrywide Financial and Merrill Lynch were bought by Bank of America; Bear Stearns was bought by J.P. Morgan). Numerous banks and other financial institutions received emergency government loans to stay afloat.
As layoffs began to mount and home values fell, consumers increasingly felt squeezed and reduced their spending, which added to the economic slide. Lenders hit with real estate–related loan losses pulled back on other lending. Unemployment eventually reached 10 percent, the highest rate since the early 1980s recession.
From its late-2007 peak to its early-2009 bottom, stocks suffered their worst bear market since the Great Depression with the Dow Jones Industrial Average dropping 55 percent.
2020 COVID-19 Pandemic
As a student of economic and financial market history and having followed the same in real time for decades, I never thought I had seen or understood it all because while history may sometimes rhyme, it doesn’t exactly repeat. So when the COVID-19 pandemic in early 2020 quickly morphed into government-mandated economic shutdowns, things began to change quickly in the economy and financial markets. This was new territory for me and just about everyone else.
DR. PHIL DECLARED A FINANCIAL 9-1-1 IN LATE 2008
At the height of the 2008 financial crisis and plunging stock prices in late 2008, television psychologist Dr. Phil ran an unprecedented show focused on the economy which was entitled “Financial 9-1-1.” If that weren’t enough to scare most everyone, he made numerous dire predictions backed up by various pundits who declared that the U.S. financial system as we knew it would never be the same again. Retirement as a concept would be dead, and non-wealthy folks would be unable to get a mortgage.
The great tragedy in such hype is that this scared people out of the stock market at what turned out to be one of the best buying opportunities in many, many years. U.S. stock prices are up about 790 percent since then and foreign stocks about 360 percent!
Here are the predictions and comments made on this show (after which of each are my comments):
“I question whether retirement as a concept is even going to exist in ten years.” This sure seems like hyperbole to me! We've gotten through challenging times before, and we will again. Most retired folks don't rely on short-term stock market gains to finance their retirement.
“Pension plans are in ‘big trouble’ and plans are going to come up short due to the poor stock market.” Pension plans are well diversified (including in bonds and other investment vehicles) and have weathered challenging stock markets before. A poor return for one year or even several years won't upset diversified pension plans managed for the long term.
“We've got a hurricane here, and everyone's got a hole in the roof.” For sure, some folks were weathering tough times, but many people were not.
“It will be ‘nearly impossible’ to get a mortgage unless you're very wealthy and have excellent credit.” This is utter nonsense. While it was a bit harder to get a mortgage in the aftermath of the crisis, you didn’t have to be wealthy to qualify for a home mortgage.
“Everyone has to ‘stop spending now.’” Making a blanket statement like this without qualifications is absurd. If you lack an adequate emergency reserve (three to six months' worth of living expenses) and are burdened with consumer debt, you should examine your spending and identify ways to