Published September 14, 2018
A recent article in the Wall Street Journal talks about how the financial crisis bred fear. That fear has kept the economic recovery at a slow burn rate while risk-taking has largely been held in check. We offer this interesting read in two forms – first, as a summary from Josh Brown’s blog, followed by a link to the WSJ article itself. We hope you find it of interest as well.
From Josh Brown’s blog post titled “Instability is stabilizing”:
“The most important article you will read all week as we begin to commemorate the Great Financial Crisis, which reached its shocking apex (nadir) this month in 2008 as Lehman fell and all the dominoes around it began to wobble…”
Greg Ip at WSJ:
“Since then, they have sought to ensure it never happens again. And thus, the world has retreated from risk. That retreat has reshaped institutions, regulations and attitudes, and in the process the economy. It’s why economic growth has been so durable yet so muted, with less of the risk-taking that both drives booms and busts and raises long-run growth.”
What he’s saying is that the lack of enthusiasm and continued risk aversion partly explain the length of the current expansion – we were so afraid that we simply never got excited enough to blow back up again. This is so, so critical to understand.
“This pessimism is why the bull market has lasted so long: There are fewer bulls forced to sell into downturns. The late economist Hyman Minsky anticipated the crisis with his thesis that “stability is destabilizing.” Long periods of calm induce behavior and innovation that make the next downturn more violent. The converse explains the aftermath: Instability is stabilizing. “The events of 2008-09 create appreciation for the possibility of events like 2008-09, which prompts risk-reducing behavioral changes that make the system more stable,” Mr. Thomas writes in Pessimism’s Pitfalls as an Investment Strategy: The Perils of the “Next Subprime”. Among them: businesses hold more cash, banks are less leveraged, and policymakers intervene more to stabilize markets. With less leverage and fewer channels of international contagion, financial disruptions burn themselves out before they become full-fledged crises.
Digest this idea. It will most assuredly come in handy some time in the future. Stability is destabilizing because of the amount of risk-taking it engenders. We may be experiencing too much stability now. Instability is stabilizing – when everyone is too afraid to take big risks, it’s hard to get a truly threatening bubble underway.”
The original Wall Street Journal article: The Financial Crisis Made Us Afraid of Risk – For a While
After beginning the month of September with losses, stocks this week staged a modest rebound. The S&P 500 found its footing in Monday’s trade after four consecutive losing sessions with a +0.2% lift on no significant new news. The rise gathered steam Tuesday with investors remaining focused on trade issues with China and the coming hurricane on the U.S. eastern seaboard. Stocks added +0.4% on the day. Apple (AAPL) announced new iPhone models Wednesday while semiconductors came under pressure from a downgrade of Micron (MU). Oil prices continued a storm-related rise. Stocks were flat. Thursday brought a tame inflation report and a possible new round of trade talks with China. The combination pushed stocks higher by +0.5%. A batch of generally positive economic reports Friday kept support under stocks, though the broad market indexes closed the day flat.
Stocks bounced back after the prior week’s downdraft with the S&P 500 (SPY) rising back above 2900 and gaining +1.14% for the week. The Nasdaq 100 (QQQ) recovered +1.59% while small-cap stocks (IWM) lagged with a +0.42% gain. The past couple of weeks have reinforced the market’s general uptrend by bouncing off key short-term support levels and holding near record high levels. International markets, by contrast, have been in steady downtrends for much of the year.
Warm wishes and until next week.