How the Stock Market Has Changed Over the Last 30 Years

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Updated: May 2020

Should I Be Nervous About the Stock Market Now?

Have you been feeling this way? I have been hearing from a lot of folks that have been on the recent roller coaster stock market ride and they are stressed and frustrated. Given the partial recovery from the initial selloff in late February and into March, I think a lot of the current volatility is a result of some fundamental changes in how the stock market works today.

Won’t Everything Go Back to Normal Once The Virus Is Under Control?

This is a great question. I would ask you what that means, “go back to normal”? Who knows when the economy will fully re-open? There will likely be many jobs and businesses that will not be coming back. The flip side to this is that some new industries and ways to do things that will be created, that will change the make up of our economy and our workforce.

I think you can look back to the 1930’s to get some idea as to how big those changes may be. Banking, retail, real estate, stock markets and government are among the areas that experienced significant changes that last until today.

Haven’t We Seen The Bottom? The Market Came Back, Isn’t Everything Ok Now?

The short answer is “who knows”? I can give you my experienced outlook based on many decades of market activity, but at the end of the day, I would not be surprised if the losses in stocks over the past several weeks are just the beginning of a full on “correction” that could drive stock and other investment values down significantly. Many people are making the argument that our economy was entering a recession last fall as stock prices were rising, while profits were dropping.

In September of 2019, I posted “Is the reward worth the risk” where, for the first time on my blog, I warned readers about excessive valuations in many asset classes and suggested that you should move out of riskier assets and protect your investments from a significant drop in value. Back then I quoted a Morgan Stanley research report that said “these indicators point to business expansion coming to a halt near June”.

I was struck by their choice of words, ‘expansion coming to a HALT near June’. Normally this type of report would suggest things would be more orderly or gradual at the end of a bull market, but this statement didn’t leave much room for interpretation.

See, Covid-19 was not the cause of this downturn, it was the accelerant. The stock market was overdue for a sell off, we just didn’t know what the catalyst would be.

Given how major corrections have unfolded in the past, the recovery from the last couple of weeks that saw about a 50% bounce back from the low in late March that took the market down over 30% was to be expected. I can show you this pattern from 2008, 2000, 1973, 1930 just to name a few.

The market had a sharp initial drop, a bounce (call me if you want to know what they call that bounce on Wall Street) and then a much deeper sell off. So, if can learn anything from history, there is a strong chance that the bottom will be much lower than where we are today.

So, If A Bigger Selloff Is Coming, What Can I Do? Isn’t It Too Late?

I can give you an emphatic, No. It is not too late to adjust and achieve your financial goals. Now more than ever it is critical to know your “why”. Why am I saving? Why do I own the investments I do? Those two questions should be working together. These days I see a lot of folks who are definitely out of sync in this regard.

For example, if you want to retire next year, where will your income be generated? If your portfolio dropped by 40%, would that change your plans? If I wanted to invest for college, and my student was going to go away next fall, would it make sense for me to invest in stocks that could go down and jeopardize the ability to pay for school?

So you can see how important using the right tools to achieve the ultimate results you are working towards. This is why so many who are just investing “to make money” end up losing so much, they just don’t know why they are investing and can easily take on too much risk.

The recent bounce in stocks has provided a second window to reduce risks. If you are a trader, you got to love this market. If you are an investor, it is a nightmare. After all, do you move to cash and earn nothing, or do you stay invested and risk losing money.

But the Market Came Back, Isn’t Everything Ok?

I guess that depends on your perspective. Given the severe drop in profits and revenues, stocks are currently far more expensive, by most traditional measurements of value (price to earnings, price to book, price to sales) than they were63 months ago when we were talking about over valuation and how much risk was building in the market.

I gave many specific examples of these measurements in the blog post I wrote last August, “Is the Reward Worth the Risk?” If you are interested in learning more, check that post out.

When we see valuations vary so far from historical norms, something must give. Either profits and revenues have to rise to justify prices, or prices have to fall to reflect actual values. Either way, it does not bode well for stocks. If they wait for profits to rise, then the shares will not go up and if shares go down to balance with current profit levels….well you know what that means.

That Means That Real Estate and Bonds Are Good Alternatives, Right?

A lot of people tell you to be diversified in order to reduce risk. What if the things you thought meant you were diversified, didn’t protect you? Over the years many asset classes have become “correlated”. For years, investors felt that real estate was a diversification from stocks and would be strong if stocks were weak.

Looking back at 2007-2009, both went down sharply, for many the losses in real estate were even greater than they experienced in their stock portfolios. There are some niches in the real estate sector that look like they will retain value and income through any recession that may result for the current situation. Things like storage units and manufactured housing are 2 areas that are holding up well and should continue to do so.

Summing It Up

There are fundamental and technical reasons that risk is extremely high in stocks and other asset classes currently. The things that will work in this environment are some of the same things that will work when markets are great.

1. Have cash available to you. There will be bargains once things settle down.
2. Be clear as to your objectives and timelines and match strategies accordingly. This is knowing your why.
3. Take advantage of low rates to refinance your mortgages (pay off or refinance other debts as well). If you don’t have cash available, you might consider taking some cash out when you refi. There are several things that go into that decision. If you are not sure, we have a program that will help you determine the actual cost of your mortgage (hint: interest rates are only part of it).
4. Reduce expenses where possible. There are many businesses offering significant discounts on both goods and services. Being efficient will help reduce the stress of a recession.

What’s Next for the Stock Market?

The good news is that the virus will someday not be the main topic of conversation. When that time comes I would want you to be in the best situation you can be in order to enjoy and prosper when that happens. In the meantime, stay patient, reduce risk, and clarify your thinking. If we can help, contact us and we will do our best to help you “Retire Happy”
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