September 11, 2018

This week marks the anniversary of the two most traumatic events of the 21st Century so far.

September 11, 2001 is a date that will forever live in infamy – 17 years ago today – and to a lesser extent so is September 15, 2008, when Lehman Brothers filed for Chapter 11 bankruptcy, the largest bankruptcy in U.S. history, despite Lehman’s then-holdings of over $600 billion in paper assets. The main culprit was bad real estate debt. The New York Federal Reserve Bank had engineered a Bear Stearns merger/bailout six months previously (March 14), but the government inexplicably let Lehman fail while one day later they loaned AIG $85 billion in exchange for an 80% stake in that giant insurer. A financial panic was on.

The market levitated for a couple of days, like Wile E Coyote running off a cliff, but then it entered a freefall not seen since 1987. In two months, the S&P 500 fell 40%, from 1255.08 on September 19 to 752.44 on November 20, 2008. In all, the S&P fell 57.7% from its peak in October of 2007 to its nadir in March 2009, the fastest and deepest bear market plunge in a major broad-based market index since the 1929-1932 market crash. (Nasdaq fell farther in 2000-02, but that was a narrower tech-focused index.)

I began writing these regular columns for Navellier & Associates in May 2009, shortly after this bull market began, and my second column (the first covered the rise of China) was how a bear market of such massive proportions implies a bull market of equally historic proportions to follow. I cited the all-but-forgotten 372% bull market from 1932 to 1937, which followed the 1929 crash. I explained the concept of “regression to the mean” and how the long bear of 1966-82 led to the long boom of 1982-1999. In the same way, I predicted that the “lost decade” for stocks from 2000 to 2009 should precede a great decade.

That column seemed so out of tune with the times that Matt Krantz of USA Today called me up and seemed incredulous that I could write such heresies. He wrote a column quoting me and Louis Navellier saying such things back in May 2009, but it turned out to be true. The S&P 500 is up 331% in the 9-1/2 years since the market bottom of March 9, 2009. Some scare-mongers like to say 2008 can happen again but I showed you last week that Americans are saving more. The scars of 2008 have sobered most of us.

All this has happened before, of course. A whole generation of Americans was sobered by the Great Depression. Thankfully, no Depression followed the 1987 or 2008 crashes, but there are some parallels.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary

The Wall Street Journal showed us last Friday (in “Ready, Set, Strive – Gen Z is Coming: Battle-scarred, they are sober, driven by money and socially awkward, a 1930s throwback”) that “Generation Z” (born 1996 and later) are also saving more and spending less. They don’t want to run up college debt like their parents. They don’t drink, drive, or party as much and are more serious. (I can attest this is true for my three college-attending grandsons!) This represents a fallout from the pain of 2008, the article says.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary

Crises are unavoidable. How we handle them is optional. This time around, investors have been cautious in re-entering the market. Most have saved more, and now our children are taking precautionary measures against future crises. That’s a positive reaction, which makes another “bubble” situation far less likely.

Economic and Market Fundamentals are Still Strong

The latest array of economic and market indicators points toward a healthy economy and a rising market, nothing like the storm clouds that appeared on the horizon a decade ago this week, or in 2000-02.

The Atlanta Fed’s GDPNow model computes third-quarter GDP at a 4.4% annual rate. Their range of growth expectations for the current quarter has ranged from 4.1% to 5.0% (see chart, below).

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary

U.S. consumer confidence in August rose to its highest level since October 2000, according to the Conference Board, exceeding economists’ expectations by a long shot. Only one in eight (12.7%) said “jobs are hard to get,” the lowest reading since March 2001. Lynn Franco, who runs these surveys, says “these historically high confidence levels should continue to support healthy consumer spending.”

According to the BEA, second-quarter corporate profits are up 16.1% from the second quarter of 2017, the best year-over-year increase in six years (as measured by the National Income and Product Accounts, NIPA, which measures both public and private companies). Part of this was due to the tax cuts. The tax cuts are permanent, but the year-over-year comparisons will be more difficult in 2019. Still, lower tax burdens imply more bottom-line earnings and profits for Corporate America for many years to come.

S&P operating earnings shot up 25.5% (year over year) in the second quarter to a record $1.3 trillion annual rate, up 5.4% from then-record first-quarter earnings – both a product of the latest tax cut. Due to record share buy-backs, S&P operating earnings per share rose 25.9% and revenues per share rose 10.4%.

As a result of these (and other) fundamentals, the major MSCI stock price indexes show the U.S. market is up 8.7% year-to-date, while the rest of the world is suffering: The European Union is -1.8% and the UK is -3.6%. Within Europe, some of the biggest economies are worse off: Germany is down 5.4%, Spain -7% and Italy -8.1%. In Asia, China is -9%, South Korea -6.4%, and Japan -4%. Emerging Markets are -3.5%.

The U.S. is still the best place to invest – a decade after the 2008 crisis and 17 years after 9/11.

About The Author

Gary Alexander

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. *All content of “Growth Mail” represents the opinion of Gary Alexander*


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