Stock Market History: Will the Stock Market Recover?
Due to their ease of use, efficiency and regulation oversight, 401(k) plans have become the gold standard for most Americans to invest in their future. As the COVID-19 pandemic continues to put a strangle hold on the worldwide economy, we can take solace that government intervention has been able to prevent a complete economic collapse.
The most recent example of mass government financial intervention was the 2008 TARP bailout which ultimately allowed banks and other financial institutions to rebound and create the longest bull market in U.S. history. During times of financial crisis, history always has been a good indicator of what to expect for the future.
Let’s review one of the first market bubbles, courtesy of the mighty 17th Century Dutch Republic, for possible answers when looking at today’s business environment.
In 1602, while the New World frontiers were starting to open for trade, the Dutch East India Company issued the first paper stock shares, allowing shareholders to conveniently buy, sell and trade their stock with other shareholders and investors (otherwise known as a stock market). During the 17th century, the Dutch Republic was the world’s leading economic powerhouse, built on the most sophisticated financial system in the world at the time. With prosperity came social symbols, and to the Dutch, that meant tulips- beautiful, exotic, imported tulips.
Investors in the United States today are able to enjoy the benefits of an open-architecture 401(k) plan that allows for proper diversification in an efficient marketplace. This was not the case in the 1630s, as speculators were purchasing tulip bulbs for the price of a house. Demand for this ultimate social symbol by the winter of 1636-37 had citizens up and down the social status scale of the Dutch Republic involved in the action. Demand skyrocketed and tulips were trading frequently at absurd prices.
Then on February 3, 1937 at a public auction, it appeared that everyone collectively asked themselves, “Why does a tulip cost so much?”, and no tulips were sold that day.
Panic started immediately and the bubble bursted as many speculative investors were now holding future contracts that were barely worth the paper they were printed on. The graph to the left illustrates the tulip price index from 1636-1637, via history.com.
Since 2000, the U.S. economy has experienced bubbles in both technology and housing. Many technology companies whose paper value skyrocketed in a short amount of time folded, leaving shareholders holding worthless stock. Prior to 2008, it was unfathomable that real estate could decrease in value. The result of each bubble undoubtedly caused short-term pain from private equity investors to 401(k) account holders. Compared to the 17th century, however, financial markets are incredibly diverse and efficient, ensuring that investment portfolios are not irreparably damaged.
As unfortunate as the Great Recession of 2008 was, many positive advancements within the 401(k) industry were created, such as making low-cost small-business 401(k) plans more readily available, the prominence of low-cost 401(k) index based investments and greater transparency of fees.
This evolution has made retirement planning available to small businesses which, 10 years ago, may not have had access to a 401(k) plan. Participants can take advantage of the tax breaks associated with 401(k) plans, and can also keep investing each pay period giving them an opportunity to take advantage of dollar-cost averaging during downturns in the market.
The COVID-19 pandemic has created an economic situation that is unique to most of the world’s living population. Looking back to history for prior macro-economic hardships is important because placing things into perspective helps when trying to figure out when “normal” will return and what our new “normal” looks like.
As bad as the tulip mania crash of 1637 was, Holland is still widely known for their tulips. As bad as the dot com bubble of 2000 was, Silicon Valley is still known as a world leader in technology. History proves people and markets are incredibly resilient.
Keep this history lesson in mind when reviewing your 401(k) plan.
