Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Portfolio > ETFs > Broad Market

It's Boom, Bust, Boom...

Your article was successfully shared with the contacts you provided.

A few weeks ago I voiced my concern over the prior week’s massive dip in the stock market, the genesis of which we have yet to discover. I commented on the extreme amount of debt in Europe and here at home, and how this was an unsustainable path. This buildup of debt is simply the product of decades of overspending. Overspending, as it is, is simply leveraging future wages. As long as future wages continue to outpace the required debt payment, the “house of cards” can remain standing. However, if wage growth slows, debt defaults increase, and a downward cycle begins. This is precisely what happened as the housing bubble burst. Median home prices had outstripped median income. The ratio of median home prices to median income is normally around 3:1, but due to soaring real estate values, this ratio grew to around 5:1. This, my friends was a “bubble extraordinaire.” Moreover, during this buildup, so much of an individual’s wealth was tied up in their homes through mortgages and second mortgages, that when prices began to fall, homeowners found themselves underwater. Hence, they abandoned their homes, and the problem was exacerbated.

Here’s my point: Booms are always followed by Busts which are always followed by Booms!

I recall in the late 1990s, the trailing 10-, 15- and 20-year returns on the stock market were so much higher than the long term average, that a period of underperformance was inevitable. Perhaps I should say that the rapid economic growth during the ’80s and ’90s was not sustainable.

Let’s take a brief look at another period in American history from 1900-1929. This was a time of incredible boom which brought the production of American oil, the automobile assembly line, an incredible expansion of urban areas through massive road construction, and the mobilization of the American population. The economy grew at a very rapid, but unsustainable pace. This boom was followed by the most difficult economic contraction of the 20th century, a.k.a., The Great Depression.

Today, it’s been less than 24 months since we saw the near collapse of the entire financial system. Do we really believe everything has worked itself out in such a short time? When I discuss my concern about the stock market, I am not so much trying to “time the market” as I am trying to read the economy with the understanding that a healthy stock market relies on strong economic growth.

Today, with unemployment stuck at around 10%, can the remaining 90% of the workforce provide the necessary level of economic activity to put us back on the path to prosperity, even with a major trading partner (Europe) in such dire straits? I’m not optimistic about that. Therefore, I remain bearish, not because I am trying to time the market, but because I don’t see how we can sustain a healthy economic growth rate while businesses and individuals continue to deleverage.

I would welcome your comments, but please, I am not a market timer. I’m just a cautious fiduciary trying to do the best I can for my clients.

I’d also like to know this: Are you a bull or a bear?

Thanks for reading!


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.