S&P 500 & The Life Cycle
1957 - 2008
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 in 1957.
The pattern of the index for thirty years supported the life cycle. In the late 1980s, a major sea change in the character of the index began that slowly severed this vital link.
Enlarge the chart to the right and you will see the progression of the S&P 500 (black line) for over a half- century overlaid on top of the four stages of life. You will also see a strikingly clear picture of the actual course that lead to the point where the entire global financial system was shaken to its core as the world's largest economy became destabilized and the term Financial Crisis entered our everyday life.
The Drift
Despite any of the numerous challenges the American economy faced during the first thirty years of the index, we can clearly see that there was a sustainable rate of progression that operated within manageable and less than earth-shaking margins of fluctuation. Beginning around 1987, a major sea change in the character of the index started to unfold driven by expectations -- from the top of the financial ladder on down -- that were increasingly unrealistic.
For over two decades we had been drifting into unchartered waters, not realizing on the collective level that our perception of risk-taking -- and what was actually affordable -- was lagging or falling behind reality. As a consequence, in the buildup of this colossal financial house of cards that met its inevitable point of implosion, 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 in previous decades we were able to rely on for reasonable stability and support.
Who Was On Watch?
For the pros who had the responsibility of closely monitoring the economy and the financial markets, it was not a surprise that these historically steep and dangerous angles of ascent would lead to unsustainable "bubbles" that would eventually reach their points of exhaustion, only to be followed by a mirror image drops to the downside and disastrous results.
Why far too many of these pros sat on their hands, watched as this cancer metastasized and chose not to raise a general public alarm of threat to our system will be dealt with in a separate discussion.
The Turning Point: One Responsible Woman vs. The Power Boys
There was one responsible, clear-thinking woman who saw the Financial Crisis coming and raised the alarm to the anointed ones who were running the show back in the 90s -- including some who are still calling the shots today. Rather than taking action when there was still time to get at the root of the problem, they chose instead -- in the face of irrefutable facts -- to mobilize their lackey forces to quickly shut her down.
Had the Power Boys chosen to do the right thing, construction of our house of cards would have been stopped before it became a skyscraper.
The Lost Decade
For the far greater number of people who devoted their time and attention to making the real economy actually function, and, because of their trust in the system, did not have any kind of a reliable automatic defense system in place, they were left to watch in shock and horror as these bubbles exploded and gains achieved over lifetimes of dedicated work and savings quickly dissolved into severe losses.
It is important to note that the damage caused by the 2008 bubble explosion was compounded by the fact that many people had yet to recover from big losses of only eight years earlier when the dot-com bubble fizzled out in the latter part of 2000.
And in the last ten years, in terms of progress made, we are looking at a lost decade according to the S&P 500, Dow Jones Industrial Average and NASDAQ:
The old adage bears repeating: Because it cannot be replaced, time is one of our most valuable assets.
The Costs
The incredible amounts of life-accumulated assets and savings – not to mention time value -- that have been 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 was 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.
Have we learned anything?
The latest update below indicates that we still have a ways to go. It also demonstrates the basic rule of technical analysis that any angle of ascent above 45 degrees is not sustainable, meaning the roller coaster ride continues.
Realistically, no one really knows -- nor can we as individuals any longer afford to wait and see -- how long key financial 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. Decades of bad habits are not broken easily.
However, 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.
Financial Conservation: A New Perspective
Fundamental to the process of rebuilding the engine of our economy will be to closely examine a number of the popular, long-held assumptions that no longer apply -- not to mention the more obvious ones that never were based in reality, making a phenomenon like the Financial Crisis possible.
Like the natural resources we all depend on, our financial resources are of equal importance. Especially considering how one supports and impacts the other. The ongoing fallout from the Financial Crisis is not a regional event, but a global contagion reaching and affecting every corner of planet Earth.
Do a Google search on conservation of natural resources and see what comes up. Then try a search on conservation of financial resources and compare the results.
From the same level of concern and priority given to the preservation and sustainability of our natural resources, would it not make sense that the universally established principles and theme of Conservation be broadened to include what we have come to realize, unmistakably, are our limited financial resources?
Back to basics is the way forward.
Relying less on predictions that are heavily loaded with hidden, self-serving agendas and more on long-term planning and preparation for the inevitable and unpredictable twists and turns that lie ahead will bring the individual firmly in step with the realities of a new economic era whose roots have been taking hold for decades.
We're hearing a lot of talk about reform of the system. The real question -- and central point of Financial Conservation -- is that while the house continues to burn, the oil continues to leak and the bureaucrats continue to chase their tails in circles, what are we as individuals going to do, what action are we going to take to secure our own financial future?
Learn crisis-tested strategies for long-term financial security and independence based on the Core Principles of Financial Conservation.
