Five Years After the Financial Crisis

It’s now been five years since some of the darkest days of the 2008 Financial Crisis.  The stock market has fully recovered and has gone on to reach new highs.  The data also tell us that U.S. household net worth (assets minus liabilities) reached a new all-time high of $76.4 trillion in this year’s third quarter.

It’s interesting to see what comprises our personal balance sheets.  While for many their home is the largest financial asset, it only accounts for 24% or $21.2 trillion of our collective $88.4 trillion in assets.  The combination of pensions and other financial assets account for 60% of our nation’s household financial assets.  That’s $53.0 trillion in financial assets – a staggering total by any measure.  This demonstrates how important our financial markets are and why investment friendly policies are important to our welfare as a nation.

On the liability side, home mortgages are the largest debt we collectively carry, representing 69% of the total or $9.3 trillion of debt.  Student loan debt (9% of total) is now larger than credit card debt (6% of total). In aggregate it appears that U.S. households have a reasonable level of debt versus their assets (at only 15%). And, the good news is that the cost to service the debt we have is at 35 year lows.

While not evenly spread across the population, in aggregate, our country has recovered financially from the financial crisis; the same can not be said psychologically.  Our angst may arise from the persistently high unemployment rate – we likely all know someone who remains unemployed or underemployed.  Our angst also comes from a dysfunctional federal government that seems to create one “crisis” after another!

Third Quarter 2013

Considering the ongoing political brinkmanship and dysfunction, it is surprising that the stock market has performed so well. U.S. stocks continued to climb in the third quarter, while bonds continued to languish.  The S&P 500 rose 5.3% and finished the quarter up nearly 20% year-to-date.  On the other hand, as interest rates climbed most bond categories suffered this year, as reflected by the 1.9% decline in the Barclays U.S. Aggregate Bond Index.

While any investor would welcome a circumstance in which all markets went up at the same time, we build diversified portfolios precisely because we know that it is not likely to happen.  This year, the case in point; Developing Market equities are down 4.4% year-to-date (think China, India, Russia, Brazil, etc.) and Commodities are down 8.6% (Metals, Energy, Grains, etc.).  It’s certainly not pleasant to experience a loss anytime, especially when other types of investments are up 15% or more.  You may feel that you are missing out on better returns.  We actually welcome this type of volatility as it allows us to periodically rebalance portfolios by buying these recent underperforming areas (“buy low”) and selling investments in areas that have performed well (“sell high”).  It’s not that we try to sell at the peak and buy at the bottom, but rather the action of rebalancing reduces risk and enhances results over time.  We would much prefer to have this situation than see everything go up and down in unison.

The strong year-to-date results in the U.S. equity market begs the question about whether stocks still have room to go higher.  While we don’t know whether stocks will continue to rise, we do observe that stocks are generally still more attractively priced than bonds.  If the companies in the S&P 500 treated their stockholders like bondholders and paid out all of their net income, then stocks would offer a yield of 7.0%.  In contrast, bonds of those same companies offer a yield of 5.4%.  Prior to the 2008 Financial Crisis, stocks frequently traded at a premium to bonds (since stocks can experience growing earnings, while bond holders receive fixed interest payments).  Since 2009 stocks have been more attractively priced versus bonds.  Perhaps this gap is finally closing – as stocks perform well or as interest rates rise, or a combination of both.

The last five years have certainly shown us the importance of both having a plan and the discipline to stick with it.  There is no doubt that to successfully navigate the future will also require both.

“History shows us that investors lose far more money as a result of their own actions than markets lose for them.”                                                                                                Eleanor Blayney