can and has<\/em> recovered. Brighter days follow the dark ones.<\/p>\nFor investors, surviving the financial crisis often meant not believing the most severe of doomsday scenarios about the U.S. economy. It also meant enduring some pain to remain patient. As we know today with the benefit of hindsight, it would have been better to have faith that the U.S. economy and stock markets would not only recover, but reach new heights. Throughout history, they have, and I believe this time around is no exception.<\/p>\n
There are several lessons and takeaways that Zacks Investment Management took from the financial crisis, which we apply in our investment approach to this day. But this week, I want to highlight four that I think are the most important.<\/p>\n
Takeaway #1: Most People Still Get the Cause of the Crisis Wrong<\/strong><\/p>\nThe scapegoats for the financial crisis are almost always \u2018greedy Wall Street bankers.\u2019 While there is certainly fault in abhorrent risk management and over-leverage, blaming Wall Street for the entire crisis misses the full picture, in my view.<\/p>\n
Mortgage originators share in the blame. Homeowners and folks who bought two and three houses they couldn\u2019t afford are to blame. And perhaps more importantly, bad regulation is to blame.<\/p>\n
Excess was building up in the capital markets and housing markets with subprime mortgages and banks owning too many mortgage-backed securities. Chances are, the bubble would have burst on its own. But in my opinion, the event that tipped the market into a frenzy \u2013 and made matters far worse than they had to be \u2013 was the issuance of accounting regulation FAS 157 on November 15, 2007 (days away from the peak of the market).<\/p>\n
In short, FAS 157 required banks to use mark-to-market accounting to account for mortgage-backed securities, which essentially deemed these securities worthless overnight. Balance sheets collapsed, and the credit markets froze. It happened in the blink of an eye.3<\/sup><\/p>\nFormer Federal Reserve Chairman, Ben Bernanke, released a new research paper stating that it was this credit-market panic and the runs on credit markets \u2013 not the housing bust \u2013<\/em> that better explains the crisis.4<\/sup><\/p>\nTakeaway #2: Regulation Isn\u2019t Inherently Good or Bad \u2013 It Just \u2018Is\u2019<\/strong><\/p>\nIn the case of FAS 157, I\u2019d say regulation was bad. But not all regulations are bad or inhibitive to economic progress. In many cases, regulations are just a fact of life that businesses have to deal with and oftentimes work around.<\/p>\n
Following the financial crisis, there was a rush to regulate in an effort to prevent the crisis from happening again. There was Basel III, which was a global financial reform effort to boost major banks\u2019 capital positions across the world. In the U.S., there was the Dodd-Frank regulation, which set requirements for how much tiered capital banks needed to keep on balance sheets, established \u201cstress tests\u201d for the nation\u2019s biggest banks, and created the Financial Stability Oversight Council aimed at identifying and mitigating systemic risks.5<\/sup><\/p>\nWere all of these new regulations necessary and\/or helpful? I\u2019d say yes and no, and that some regulations are working while others aren\u2019t. Again, regulations just are what they are. They may hamstring growth and risk-taking, but they may also serve to prevent a repeat.<\/p>\n
Takeaway #3: From a Debt Perspective, Americans are Better Off<\/strong><\/p>\nAmerican households appear to have learned our lesson from the crisis. Leading up to the crisis, Americans debt service payments as a percent of disposable income was too high, nearing 14%. Today that number is down to a little over 10%, signaling that households are far less leveraged than they were pre-crisis. One item to note (and to keep an eye on), however, is that while households and banks have cut back on leverage, corporations and the U.S. government have gone the other way.6<\/sup><\/p>\n![\"\"](\"https:\/\/zacksim.com\/blog\/wp-content\/uploads\/2022\/02\/2018-09-22-image-1-of-1-1024x412.png\")
<\/p>\n
Source: Federal Reserve Bank of St. Louis<\/em><\/strong><\/p>\nTakeaway #4: Crises and\/or Bear Markets Usually End When Circumstances are Still Dire <\/strong><\/p>\nWhen the bear market ended in March 2009, economic conditions were awful, and investors were completely fatigued. Economic data at the time showed that Real GDP had declined -6.3% in Q4 2008, and that capacity utilization had dropped to 69% in March (2009), a record low going back to 1967.7<\/sup> It felt like a time to throw in the towel if you hadn\u2019t quit the market already.<\/p>\nBut as we know today, it was at this seemingly darkest hour that the economy and the stock market were poised to start the 10-year long economic expansion and bull market that continues to this day, as I write. The lesson we remember here is that it is often when things feel the worst that they are about to get a lot better.<\/p>\n
Bottom Line for Investors <\/strong><\/p>\nI believe with confidence that we will experience another crisis in the future. I cannot say when or how severe, just that I believe it will occur.<\/p>\n
But I also believe that the U.S. economy will bounce back, the U.S. stock market will bounce back, and that American workers will live through it. Our skills as a nation won\u2019t go away, our innovative spirits won\u2019t go away, and our ability to create great companies and great products won\u2019t go away. I\u2019d argue they will only get stronger. And for long-term investors, that\u2019s the bottom line.<\/p>\n
In the meantime, I\u2019d encourage investors to stay focused on the fundamentals. And to help you do just that, I invite you to download our Just-Released Stock Market Outlook Report >>8<\/sup><\/strong><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"10 years ago last week, on September 15, 2008, Lehman Brothers filed for bankruptcy. At the time, few investors, analysts, […]<\/p>\n","protected":false},"author":3,"featured_media":7430,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[63,71],"tags":[],"class_list":["post-7753","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitch-on-the-markets","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/7753","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=7753"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/7753\/revisions"}],"predecessor-version":[{"id":10835,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/7753\/revisions\/10835"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=7753"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=7753"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=7753"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}