I realized, just recently, that May 2017 marked my 20th year as a financial advisor. Looking back at some of the wonderful friendships formed, challenges overcome, and successes for our clients achieved, we continue to be humbled by the trust given and privilege received in helping our clients achieve their financials goals. As we look toward the future and the next twenty years, we have many exciting plans on how we can better serve you, our clients. Somehow, however, it felt as though for this newsletter, rather than discuss the future, I would reflect on the past and hopefully, some of what I have learned in that time.
Ah yes. May of 1997. The Dow Jones was breaking 7,000. One of the greatest bull markets in history was in full swing. People used to say” How did we manage to do business before fax machines?” (Do you remember those?) This was of course the time of “The New Normal”. This rate of growth could be sustained, so the story went, because the computer and the fledgling internet, had changed everything, setting us on a much faster expansion than ever before. It did not matter if a company made money, if it had “.com” in its name, its stock was worth buying, at almost any price. AOL was buying out Time Warner. Some quit their jobs to become full time day traders. The Wall Street Journal suggested that investors “rethink” the “quaint idea” of profits.
And this still had time to run, this “New Normal”. The biggest threat on the horizon was Y2K. There was a possibility that technology might shut down, your refrigerator might stop cooling, airplanes might drop from the sky on January 1, 2000. Instead, we passed peacefully into the new century and on January 14, 2000 the Dow stood at 11,723. The “New Normal” had not blinked and it rolled right on.
The peak happened sometime around March of 2000. In the next 30 months, the NASDAQ would lose 78% of its value. Another “New Normal” had arrived. Venture capital dried up, Accounting scandals such as at WorldCom and Enron added to the loss of confidence. In this “New Normal”, growth would be lower than before, indefinitely. While this was still working through, the nightmare of 9/11 happened. The combination of this very real horror with the sputtering capital markets drove the Dow down to 7,674 by March of 2003. The “New Normal” of small or declining investment returns had arrived and we had better learn to live with it. However, this beautiful theory was shot down by an ugly fact. By the end of 2003 the Dow hit 10,454. The “New Normal” hadn’t been so normal after all.
The Dow grew quite steadily through to the end of 2006, when it stood at 12,463. Then we started to hear about a new “New Normal”. Largely based on real estate, investments called mortgage- backed securities and, derived from them, collateralized debt obligations (CDOs), had established a “New Normal”. The risk of lending had been practically removed and loans could readily be made to those who could not afford them. This wonderful world of “almost risk free” lending helped drive the Dow to 13,900 by July of 2007. What a glorious “New Normal” that was, and the price of real estate would go on increasing forever. Except that it didn’t.
By March 9, 2009 the Dow had dropped to 6,507. More than a decade of investment returns had been wiped off the table. And, you guessed it, another “New Normal” had arrived. Once again this would mean low investment returns as far out as the gurus could see (which quite often seemed to be very far indeed).
Almost inevitably, things have not worked out like that. As we prepare to celebrate July 4th, 2017 the Dow is over 21,400. Who would like to suggest we are in another “New Normal”?
Before anyone reading this proposes that, maybe this time it is different, and that we really are in a “New Normal”, consider this. Someone has come up with the wonderful term of FAANG companies. This name is based on the initials of the 5 companies, Facebook, Apple, Amazon, Netflix and Google. The combined capitalization of these FAANG companies is greater than that of the entire German DAX Index and almost as large as the British FTSE 100. Their gain represents about 1/3 of the growth in the S&P 500 this year. Does this seem like a “New Normal”, or does it feel like something unsustainable, something that has the whiff of the dot-com bubble or the sub-prime mortgage crisis about it? As always, we cannot know the future, but if 20 years as an advisor have taught me anything, it is to be very skeptical of anyone talking about a “New Normal” or that “things are different this time”. In 20 years, they never have been.
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Online Data, Prof. Robert Shiller, Yale University. http://www.econ.yale.edu/~shiller/data.htm
“FAANGtastic Five pull tech stocks into bubble territory” https://www.ft.com/content/b5737a4c-415e-11e7-82b6-896b95f30f58
“Big Tech accounts for a third of the gains in stocks, but that could be trouble for the market.” http://www.cnbc.com/2017/05/30/big-tech-accounts-for-a-third-of-stock-gains-but-that-could-hurt-the-market.html