In March 2009, sharemarkets started picking up from the depressed levels they had slumped to following the global financial crisis. Three months later, the US economy began to climb out of its “great recession”.
Ten years on, the US sharemarket has risen fourfold (when dividends are included) and US GDP has increased by 37 per cent. Australia’s shares on the ASX, on average (and including dividends), are up 2.7 times and our GDP is 30 per cent higher.
Here are four lessons investors can take from the decade-long recovery in investment markets and business conditions.
The GFC didn’t end the world as we know it
In 2008 and early 2009, many investors and commentators expected a “new normal” in investment markets lasting decades. They predicted secular stagnation, recurring recessions, flat or falling wages, sustained high unemployment and not much inflation (maybe even deflation). Returns on shares and property would be volatile and sparse.
As things turned out — and largely thanks to accommodative monetary policies — the big picture hasn’t been as gloomy as was feared: average investment returns have (mostly) exceeded expectations; the global economy has achieved modest growth; none of the major economies has tipped into recession, including Australia; job numbers have increased strongly, especially in the US and Australia; but wages haven’t increased by much and inflation has remained at near-negligible levels.
Commentary has been too pessimistic
For much of the past decade, diehard bears have greatly outnumbered the bulls in commenting on the sharemarket outlook.
As a result, despite the abundance of reasonably positive news, most commentary has been that the better times wouldn’t last.
In 2011, it was expectations of an imminent recession in the US that were overdone. In 2012, it was fears of a sovereign debt crisis in Europe. In 2013, it was the “taper tantrum” in US bond markets. In late 2015 and early 2016, there were exaggerated worries of a hard landing for China.
And late last year, prevailing sentiment went overboard in suggesting the global economic upswing would be choked by tight US monetary policy. As Richard Henderson and Robin Wigglesworth have pointed out, one reason for this underlying bearishness is it’s “safer to be in the mainstream, even if you are wrong, than make an out-of-consensus call that could fail”.
“This is particularly acute for bulls, as being bearish and wrong is often seen as more acceptable than being bullish and wrong.
“The former are often portrayed as merely conservative and cautious investors, while the latter are cast as feckless idiots.”
False crises outnumber real crises
Paul Samuelson (a professor of economics in the US) is justly famous for observing in 1966 that “Wall Street indexes (had) predicted nine of the last five recessions! And its mistakes were beauties.” With today’s overload of swiftly transmitted information and views, false crises are more prevalent than in earlier years.
Inflation has been low but will that continue?
Many investors who, along with this aged columnist, can recall the inflation bouts of the 1980s, 1970s, 1960s and 1950s, are surprised that inflation stayed low over the past decade, despite continuing growth and generally accommodative monetary policy.
The many explanations for sustained low inflation include: enhanced fear of unemployment from the financial crisis; globalisation; the discipline on price rises from the internet; weaker unions; and the sharp decline in inflationary expectations from the successes of monetary policy in containing inflation. My guess is that inflation, as measured by consumer price indexes, will remain mostly low through 2019, but move up a notch next year, especially in the US.
In my view, most Western countries will also see, over the coming 12 months, the long-hoped-for speeding up in average wage increases. Already, the rate of increase in US average wages has climbed (to 3.4 per cent).
All that is mostly good news. But investors, including those too young to have had direct experience of inflation, need keep a close watch on statistics on the consumer price index and on wages.
Don Stammer is an adviser to Stanford Brown Financial Advisers. The views expressed are his alone.