Market watchers and strategists are big on anniversaries, so have been acknowledging that about 10 years ago, March 9, 2009, marked the end of the Great Recession bear market and beginning of the bull market run of the past decade. It wasn’t an obvious turn, as sentiment at that time remained quite poor (according to the AAII survey, 70% of investors that prior week were bearish, over two times the long-term average—near where it lies today). This has often been the case after a period of extreme losses and economic calamity, but conditions weren’t deteriorating any further. Often, since markets are forward-looking, that subtle shift is all that’s needed. From that point, over the next ten years, the market has gained an average annualized 17%—far above the 10% long-term historical average.
There hasn’t been a recession since, but that’s largely due to the deep hole the global economy fell into and the slow grind back to some semblance of normal. Frequently, as we’ve discussed previously, recessions are caused by excesses and the climb back was so extreme, no room for excess existed. We’ve seen a few areas become frothy since, but overall, absent a few hiccups such as the U.S. debt downgrade, ‘taper tantrum’ and a few others, it’s been a relatively smooth ride. We probably should not get used to it—bouncebacks from bad times are often the best times to invest, precisely when sentiment is at its worst. Interestingly though, sentiment has never become especially buoyant in this cycle, due to memories of that recession remaining fresh, political conflict, greater economic inequality measures, and perhaps other reasons. This is despite labor markets reaching multi-decade strength and inflation remaining very contained.
Back to the question of what’s changed? It depends on one’s perspective. In terms of economic and financial market repair, quite a lot. Based on a starting point of near-collapse, banks are now better capitalized and regulations have perhaps made it more difficult for a 2008 to occur again. Along those same lines, mortgage lending standards that delved into the level of fraudulent territory in some cases has been tightened up. Then again, it is rare for back-to-back financial crises to originate from the same source. Credit is a tool nearly as old as money itself, so excess could rear its head again from a different catalyst, whether it be corporate debt, government debt or another area yet to be identified. Investors can hope that lessons of the past can be remembered to prevent future crises, which could be decades, but they’re often only remembered so long.