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This Isn’t Déjà Vu All Over Again
08/30/2011 11:30 am EST
There has been a lot of talk about the economy and the markets doing a repeat performance of 2008. The fear may get you there, but the facts don’t, writes John Reese of the Validea Hot List.
There’s no denying it: On the surface, the last couple weeks have felt more than a little like the fall of 2008:
- The major stock-market indices have been swinging 4%, 5%, even 6% in a single day.
- The headlines are filled with debt-related fears.
- And investors are cramming into "safe" investments like Treasury bills at an astonishing rate.
Some key differences exist between today and the fall of 2008, however.
For one thing, back then, piles of mortgage-backed securities weren’t just dragging down banks’ balance sheets—they were making it impossible to even determine what exactly was on those balance sheets. Were those securities worth 75% of what they were thought to be worth? 50%? 30%? Or were they, quite simply, worthless?
Today, debt is again the issue, but it’s a more quantifiable sort. That doesn’t mean it’s not a problem. But more of the cards are on the table this time around, and given how much the market doesn’t like negative surprises, that’s a good thing.
US financials have also had nearly three years to recapitalize (with extensive help from Uncle Sam), and to deal with those MBS’s that were clogging their balance sheets.
Just as financials have recapitalized, US consumers have gained liquidity. The personal savings rate (savings as a percentage of disposable income) for June (the most recent month for which government data is available) was 5.4%, more than double what it was when the 2007-09 recession began.
And consider this: Americans’ "financial obligations ratio"—that is, the amount of debt the average American has as a percentage of disposable income—was 18.85% in the third quarter of 2007, right before the recession began. The Federal Reserve’s Web site has data going back to 1980, and that was the highest level on record.
In the first quarter of 2011 (the most recent data available), the figure had fallen to 16.39%, the lowest level in 17 years. That’s right, Americans’ debt loads are down to 1994 levels, something that has been largely lost amid the negative headlines that have dominated the financial world the past couple years.
Finally, US non-financial companies have gotten incredibly lean. It’s come at the expense of jobs—many companies have been hoarding cash rather than hiring, likely because they fear another 2008. But they collectively have liquidity that they did not have back in 2008.
There are also, to be sure, some negative factors not present back in 2008.
For one, to repeat a metaphor that has been beaten to death, the Federal Reserve doesn’t have nearly the amount of bullets that it had at its disposal back then. Interest rates are at rock bottom, and the Fed’s balance sheet has more than tripled over the past four years by virtue of its wide-ranging quantitative easing programs.
Nevertheless, on the whole, I’d say we’re significantly better off than we were in late 2008.
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Most investors, however, don’t think about all that. They see the declines in their portfolio, and feel the wild gyrations of the market, and flash back to ’08.
It’s to be expected—that’s how we’re hardwired. "Recency bias"—the tendency to weigh recent events more heavily when trying to predict what will happen in the future—impacts everyone, both in terms of investing and other parts of life.
In this case, it seems to be manifesting as a financial version of post-traumatic stress disorder. Any hint of the feelings they felt in ’08, and investors are jolted to the point that they’ll run the opposite direction from stocks.
Not everyone, of course. Some of the world’s best investors, including Warren Buffett, David Herro, and even the often-gloomy Jeremy Grantham, have all said they’ve been buying up shares as the market has tumbled.
What they know, and what many forget, is that it all comes back to value. And right now, there seems to be plenty of value in the market.
Using the average of last year’s operating and as-reported earnings, the S&P 500 now trades at a price/earnings ratio of about 14. Using an average of operating and as-reported earnings for the past five years, the P/E is about 17.5—hardly frothy (and that includes earnings from one of the worst periods in history.)
More importantly, plenty of individual stocks are offering exceptional values. Of course, as always, you never know when those values will be realized. A couple of our holdings have had some very rough periods recently, and in the short term the rough sledding could continue.
Given the emotional battering investors have taken in the past decade or so, and the legitimate economic concerns hovering over many parts of the world, it may take them a while to start snatching up stocks again.
But even if that is the case, to me, it’s worth a bit of a wait, especially considering the alternatives:
- Bond prices have been going through the roof, and offering little in the way of yield;
- Gold has been climbing higher and higher, but has no real source of revenue or earnings behind it—you can’t assess its true value in any tangible way;
- And cash is yielding next to nothing.
So we’ll continue to focus on attractive shares of solid companies, remembering that history has shown that staying disciplined through tough times is the way to make money over the long term.
As the great Peter Lynch said, "The real key to making money in stocks is not to get scared out of them." We don’t intend to.
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