S&P 500 vs. Life Cycles
1957 - 2008
The pattern of the S&P 500 for thirty years supported the normal life cycles. In the late 1980s, a major sea change in the character of the index began that slowly severed this vital link.
The S&P 500 is the widely followed index of large-cap American stocks that is considered a bellwether for the American economy. In its current form, the index was first published in1957. Overlaid on top of the four stages of life is the progression of the S&P 500 (black line) for over a half- century. The chart is intended to serve as a permanent visual reminder of the actual course leading to the point where as the world's largest economy became destabilized, the entire global financial system was threatened and shaken to its very core.
The Drift
Despite any of the numerous challenges the American economy faced during the first thirty years of the S&P 500, we can clearly see a rate of progression during this period of time that was sustainable and supportive to all stages of life. Beginning around 1987, a major sea change in the character of the index started to unfold driven by expectations that were increasingly unrealistic.
For over two decades, we had been drifting into unchartered waters not realizing on the collective level that the perception of our world was lagging or falling behind actual reality. As a consequence, in the buildup of this colossal financial house of cards that met its inevitable fate, there occurred a slow severing of the vital and supportive link between the unalterable stages of life and the cycles of our underlying economy that for many decades we had come to trust and therefore rely on for relative stability and support.
Who Was Watching?
For the relatively few in number who devoted their time and attention to closely monitoring these historically steep and dangerous angles of ascent, it was not a surprise that unsustainable "bubble patterns" were taking shape which would eventually reach their points of exhaustion only to be followed by mirror image drops to the downside. For the far greater number of people who devoted their time and attention to making the real economy actually function and who were invested for the long term without any kind of an automatic defense system in place, they were left to watch in surprise as these bubbles exploded and gains achieved over lifetimes of dedicated work and savings quickly dissolved into severe losses.
Furthermore, the damage caused by the 2008 bubble explosion was compounded by the fact that many people had only recently managed to get ahead or had yet to recover from where they were prior to the previous explosion that began eight years earlier in the latter part of 2000. The old adage bears repeating: Because it cannot be replaced, time is one of our most valuable assets.
The Cost
The incredible amounts of life-accumulated assets and savings that were lost as a result of the financial crisis have been widely publicized. These facts and figures are attached to real lives. Many people have and are continuing to lose their jobs, businesses and homes. For retired seniors dependent on fixed income from investments that were over-exposed to the financial markets, the impact of the crisis has been devastating - in many cases permanent. And for the younger generations, the big takeaway lesson is what happens when you trade short-term gains for long-term growth and stability.
A New Perspective
No one really knows -- nor can we afford to wait and see -- how long key markets of our economy will continue in this pattern of building speculative bubbles leading to continued bouts of debilitating volatility; or at what point they will stabilize and return to long-term rates of progression that are more reflective of the real productivity and real growth of our economy. In the meantime, we are starting to see and understand that the far-reaching governmental responses to our changing economic environment will indeed have profound, yet unpredictable consequences for current and future generations to come.
Part of the process of rebuilding the engine of our economy will be to closely examine a number of the popular, long-held assumptions that may no longer apply. For the individual this means questioning and not settling for those pat answers that ring with the same type of pre-crisis thinking that brought us to the edge of the cliff. This may be uncomfortable for some, but when the account statements arrive, whose name appears at the top? Staying accurately informed and maintaining a clear-eyed perspective will bring us firmly in step with the realities of a new economic era whose roots have been taking hold for decades.
