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The Teflon Market

by on October 15, 2017 5:00 AM

I became CEO of Nestlerode & Loy, Inc. in October 2008, almost immediately after the stock market crash of that year. The month before, on Sept. 29, the Dow Jones Industrial Average (DJIA) fell 777.68 in intra-day trading, which was the largest point drop ever in a single day.

The crash was a long-time coming with the first cracks appearing in a 28 percent downturn in October 2008’s new home permits. At first, there was relief that the real estate market was returning to normal levels. However, the leverage that had been built around the housing bubble was about to sour on banks and financial institutions.

Subprime mortgages began to default at an alarming rate and the Federal Reserve, led by Ben Bernanke, realized banks didn’t have enough liquidity to function. The Fed began buying banks’ subprime mortgages to provide liquidity. The Fed did this because of the lessons from the 1930s Great Depression, when banks went bankrupt and citizens lost faith them. Before the Great Depression, there were 25,000 banks and by 1933, 11,000 had failed. To avoid this catastrophe in modern times, we have FDIC and the Fed made a difficult decision to bail out illiquid banks.

Following the bailout of Bear Stearns (a New York-based global investment bank), Fannie Mae and Freddie Mac, I remember a sleepless night on Sunday, Sept. 14, 2008 when the news broke that Lehman Brothers was declaring bankruptcy the next day. The government would not step in to save them. This caused a snowball effect throughout the financial system. At that point, I knew how bad it was going to get. The results on the markets were devastating. At its pre-recession high, the DJIA closed at 14,164.43. On March 5, 2009, it dropped more than 50 percent to 6.594.44.

The question on every investor’s mind was “what now?” The gallows humor on Wall Street deadpanned, “There are two positions in 2008: cash or the fetal position.”

What was the right move? Well, in hindsight, for those who didn’t sell before the crash, holding steady or investing more turned out beautifully. We have been in a bull market ever since. Since March 2009, we have not experienced a 20 percent drop in the S&P 500. Volatility is at all-time lows and interest rates, while rising, are still at historically low levels.

This market has withstood a government shutdown, a surprise presidential election result, a politically- inexperienced U.S. president, and global tensions without a significant drop. It’s like Teflon: everything rolls right off of it and keeps moving upward.

The markets tend to follow Newton’s Third Law of Motion:what goes up must come down. Luckily, stock markets tend to go up more and for longer than they go down, so over long time frames, people make money. Still, the down times are inevitable. When should we expect them?

There are, of course, many things that can derail a bull market. Typically, the end of a bull market comes with a bang rather than a whimper. Irrational exuberance (with all respect to former Fed Chair Alan Greenspan) rules the day with talk of “never and always” rampant.

The good news is that secular bull markets (those that are the longest and best), which we seem to be in now, tend to last 18-20 years. But they do have short-term downturns. This one just is more resilient than most and we will see a downturn when we least expect it. It may come from a tweet or an unexpected corner of the world, but it will come, because it always does.

Bubbles happen and they pop. As philosopher-poet George Santayana said, “Those who do not learn history are doomed to repeat it.” Kurt Vonnegut Jr.’s reply, however, also rings true, “I’ve got news for Mr. Santayana: we’re doomed to repeat the past no matter what.”



Judy Loy, ChFCâ, is a Registered Investment Advisor and CEO at Nestlerode & Loy Investment Advisors, State College, Pa. A graduate of Penn State University, Loy has been with the firm since 1992, assisting clients with retirement planning, brokerage services and investment advice. She can be reached at
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