The Global Financial Crisis: 8 Years On


On this day, eight years ago, financial services firm Lehman Brothers filed for bankruptcy protection, making it the largest bankruptcy filing in the history of the United States.

Problems had already been brewing in the U.S. economy for some time, but the collapse of Lehman intensified the issues greatly. It is recognised as one of the cataclysmic events of the crisis, which soon earned the name ‘The Great Recession’ or the ‘Global Financial Crisis’, and eroded trillions of dollars of wealth from global equity markets.

Australia’s own S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) had peaked at 6,800 points in October 2007. It was sitting at 4,817 points the evening before Lehman’s collapse, with the decline finally coming to an end on 9 March 2009. It was sitting at just 3,073 points at the time, representing a whopping 55% decline from the peak.

Source: ASX

Source: ASX

Eight Years Later…

Eight years later, we are still living in the aftermath of that crash. Although it hasn’t reached the levels achieved late in 2007, the ASX 200 is sitting around 5,240 points today after almost breaching the 6,000 point mark on a number of occasions in 2015.

Central banks around the world are still trying to navigate their way through murky and unprecedented waters, with many venturing into negative interest rates for the first time in history.

Thankfully, Australia’s own interest rates were quite high at the time which gave the Reserve Bank plenty of ammunition to provide stimulus. The official cash rate is now 1.5%, with some economists suggesting the rate cutting cycle may have finally come to an end.

Kevin Rudd, who was Prime Minister at the time, also unveiled emergency stimulus plans which saw billions of dollars handed to citizens to keep the economy pumping away, while our strong economic relationship with China also helped to keep us afloat.

Eight years on, and we’re still to experience a recession. In fact, it has now been 100 quarters since we did endure a recession, which is almost a record in modern history (The Netherlands experienced 104 recession-free quarters). That isn’t to say that we won’t experience a recession — our record run will inevitably come to an end at some point — but it’s a great record to have nonetheless.

Lessons Learned

The Global Financial Crisis is something that impacted us all in one way or another. Indeed, the very memory of it is enough to keep some people out of the share market altogether in the fear of a similar event wiping out their wealth.

The problem is, there is always the risk of losing money in the share market in the short-run (hence why investors expect to achieve higher returns on their investments, for accepting that risk), and it is only those who are willing to remain patient for the long-run that can reasonably hope to achieve decent returns in the market.

In August 2013, former Motley Fool columnist Morgan Housel highlighted the historical frequency by which the market experiences falls of various magnitudes (notably, he was specifically referring to the United States’ S&P 500 index, but I’d wager the results would be similar for Australia’s ASX 200).

He found that, on average, the market experiences a 10% fall every 11 months. Every four years the market will fall around 20%, while a loss of 50% has historically been limited to two or three times per century.

That’s not to say that it won’t happen again anytime soon — markets and economies can be unpredictable beasts – but the historical odds are certainly in favour of investors.

Investors would always be wise to have some cash spare. After all, it is a risk to have all of your money exposed to the uncertainty of the share market, while having some cash sitting idle is a great way to ensure you can take advantage of opportunistic bargains if, or when, they become available.

A number of the country’s most traditional blue chip stocks, including the likes of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Telstra Corporation Ltd (ASX: TLS) and Wesfarmers Ltd (ASX: WES) have experienced remarkable returns since the market’s low in 2009, with most of the gains arguably already priced in.

But there are still a number of great businesses that are trading under the radar which could well be worth your time and effort today. You just need to know where to look!

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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