This week marks the two-year anniversary of the financial meltdown. What lessons have we learned?
On June 12, 2007, news broke that a 10-month old Bear Stearns hedge fund that speculated in mortgage-backed securities was melting down. The fund used leverage and bet heavily on bonds tied to subprime mortgages.
As the market for subprime mortgages began to implode in early 2007, so did the Bear Stearns fund.
This was the first major piece of information that all was not well in the land of finance, and, of course, you know what happened over the next two years.
Interestingly, this news made major headlines at the time, yet the stock market continued to rise for four more months until the S&P 500 index hit its all-time high on October 9, 2007.
Though the history books are still in process, here are a few meltdown lessons worth contemplating:
- Market meltdowns don’t happen all of a sudden – they leave clues. But, being able to accurately decipher those clues is very difficult.
- Stock prices can rise much further and much longer than you ever expect.
- Stock prices can fall much further and much longer than you ever expect.
- When investors panic, fundamentals go out the window and securities may drop to levels that, in hindsight, appear to be ridiculously low.
- When prices get ridiculously low, they can soar very quickly on a snapback rebound. For example, witness the nearly 40% rise in the S&P 500 index in the past three months.
- The unimaginable can happen. For example, GM and Chrysler are in bankruptcy, Lehman Brothers and Bear Stearns are gone, the government owns AIG, Fannie and Freddie, and the government has spent trillions of dollars propping up the economy and the financial system.
No matter how dark and desperate it seems in the financial markets, the sun will still rise in the east, children will play in the park, and life will go on.
As George Santayana wrote, “Those who do not learn from history are doomed to repeat it.” We realize that history does not repeat itself exactly, but it is close enough that we do all we can to learn from it.
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