Lessons from the Lehman Moment

Fri, Sep 14, 2018 - 1:15pm

Originally posted at Breifing.com

This week has been filled with remembrances of the financial crisis. We hear them every year at this time, but this year was super-charged with remembrances because it was the 10-year anniversary of the Lehman Brothers bankruptcy filing, otherwise known as the "Lehman moment."

It was some moment to be sure.

That bankruptcy filing triggered one of the most difficult periods in stock market history and it stood out as a defining moment in the worst financial crisis since the Great Depression.

There were copious reviews of why that was, yet there was a crucial conclusion that was lacking in most examinations of the moment.

That conclusion is that the Lehman Brothers bankruptcy, and the mess that came after it, represents a great example of how it pays to maintain a long-term investment outlook.

Not a Death Knell

From the time Lehman Bros. filed for bankruptcy on September 15, 2008, to the low set on March 6, 2009, the S&P 500 plummeted approximately 47%. At that low, the S&P 500 was down nearly 60% from the bull market peak it hit in October 2007.

With a dastardly performance like that, one might be thinking that it is foolish to suggest there is virtue in buy-and-hold investing. The great counterpoint to that castigation is that the S&P 500 today is UP approximately 84% from the bull market peak of October 2007.

Everything that transpired in the interim has been the subject of white papers, documentaries, major motion films, books, Congressional hearings, and weekly missives from analysts like your author.

The who-what-when-why-and-how narratives are beside today's point.

It is important to have an appreciation for it all, but it is equally important for investors, and particularly young investors, to recognize that the worst financial crisis since the Great Depression was not a death knell for the stock market any more than the Great Depression was.

The stock market was resuscitated for many reasons, not all of which were popular or easy to gauge.

But here we are.

The S&P 500 recently set a new record high, and so did the Nasdaq Composite, Russell 2000, and S&P Midcap 400 Index. The Dow Jones Industrial Average hit a record-high in January before selling off, yet it is within striking distance of reclaiming record ground.

Clearly, investors who held their index positions during the tumult of the financial crisis have done just fine and have more paper wealth to show for it than they did before the financial crisis hit.

Manure Happens

Today's missive is tied to the perspective that investors had the wherewithal to hold on, and not sell, during the crisis that followed the "Lehman moment."

We appreciate that everyone didn't have that luxury. It was a scary time, particularly for anyone near retirement or in retirement. Aside from that, we fully appreciate that individual circumstances can get in the way of the best-laid, buy-and-hold plans.

Illnesses happen; divorce happens; job losses happen. To sum things up in a G-rated way, manure happens that forces the sale of stock to help cover life's unexpected circumstances.

Not everyone had the luxury — or the stomach — to ride things out. The question is, did they eventually get back in?

Hopefully, they did; and if they have stuck to a buy-and-hold approach, then they have at least reaped some of the benefits of a bull market that began nearly ten years ago.

What It All Means

And so today, as we hear stories of what led to the financial crisis, there is the dangling question: will there be another one?

The answer is yes. The timing is what's unknown.

Separately, there is a lot being written these days about when this bull market will end. Again, the timing is unknown, yet we suspect the trigger for its end will have something to do with interest rates.

For now, many pundits are urging investors to trim back some of their big gainers and to start adopting a more defensive-minded position with their investment portfolios. Those recommendations are predicated on the thinking that this bull market is long in the tooth and that a meaningful correction, if not a bear market, is lurking on the horizon.

The recommendations are not outlandish; they are prudent for investors wanting to preserve capital in the next downturn or who may be looking to secure some profits (which you can't do unless you actually sell) from the massive upturn we have enjoyed since the depths of the financial crisis.

Those depths mark a moment in time that was scary, infuriating, and bewildering for just about everyone. Those depths, though, were also the greatest test of buy-and-hold conviction for investors who had the benefit of time on their side and weren't saddled with the need to sell at the worst of times.

It's ridiculous to say blithely that "everything worked out in the end," because everything hasn't worked out.

The stock market, however, worked its way out of a real mess, which it always does — albeit not without some pain and suffering along the way. It would be remiss not to add that it had the help of some very accommodative monetary policy, too, which is now turning less accommodative.

The latter could be the trigger for the next "moment" in the stock market, yet the ensuing recovery from the "Lehman moment" has made it clear that time is the ultimate asset for the long-term investor in the S&P 500 index when bad timing doesn't get in their way.

—Patrick J. O'Hare, Briefing.com

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Chief Market Analyst
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