Broadman & Holman Publishers
Right now I’m having amnesia and déjà vu at the same time. I think I’ve forgotten this before. - STEVEN WRIGHT
Human beings, who are almost unique in having the ability to learn from the experience of others, are also remarkable for their apparent disinclination to do so. - DOUGLAS ADAMS
For whatever was written in earlier times was written for our instruction, that through perseverance and the encouragement of the Scriptures we might have hope. - ROMANS 15:4
Search me, O God, and know my heart; try me and know my anxious thoughts. And see if there be any hurtful way in me, and lead me in the everlasting way. - PSALM 139:23–24
John clenches his teeth and his newspaper as he reads the headlines of another gut-wrenching decline in the stock market. “I can’t believe it,” he angrily blurts out to no one in particular.
“What did you say, dear?” his wife, Mary, asks as she enters the den from the kitchen, still drying the last dinner plate.
“Oh, nothing, really,” John tries to sound in control. He tells a white lie, “I am just a little concerned about the stock market and the economy.” He scans the other articles of corporate corruption, unemployment on the rise, and a likely recession.
“Well, we are OK, aren’t we?” Mary anxiously inquires.
After meeting with his stockbroker last week, John knew their portfolio of popular growth company stocks was down 40 percent from the initial amount invested. He had not told Mary yet. Forty percent! His stomach was in knots when he thought about how long it took to earn and save that 40 percent he had lost.
“We are down some,” he finally replies unconvincingly. She usually seems to know when he is spinning the news.
Her lower lip trembling, Mary tries her best to hold back an “I told you so” along with her tears. “How much money have we lost? You had told me that these investments would help us meet all our financial dreams.”
“I don’t understand how it is happening. The fellows at work had been bragging in recent years about how much they were making. Some had even quit and retired early. Well, Mary, you even heard for yourself at the Smiths’ Christmas party last year. Remember the talk about stock gains funding their vacations and new houses?”
“You promised that we were not going to do anything risky.” Her voice changed to tears. “What about your retiring? What about Johnny’s last year in college?”
“I didn’t think these companies were risky. Railroads have done well for several years. These are the 1870s. I thought we had learned our _lessons from the great ‘Panic of 1857.’”
Conversations like this one have likely happened every decade or so in American homes. If we change from railroad companies to Internet or telecommunication companies, we have the script for the heated family discussions in the early 2000s. As Yogi Berra said, “It’s déjà vu all over again.”
After the Civil War the railroads connected the coasts and provided the infrastructure for a growing economy. Railroad stocks were hot. People made outstanding returns for a while. Railroads seemed like _a “sure thing” as their potential would build the bridge into the next century. The bubble burst, helped by some corporate corruption at several major railroads, and many people lost most of their investments. This led to a prolonged stock market downturn and general economic weakness throughout the 1870s.1
The recent weakness of the stock market and the economy may seem new and different to you. This is natural because, depending on your age, you may never have experienced this type of economy. The truth is, however, it looks like, smells like, and walks like sluggish markets and economies of the past.
Solomon, no doubt an astute economist, said,
What has been will be again,
what has been done will be done again;
there is nothing new under the sun.
Is there anything of which one can say,
“Look! This is something new”?
It was here already, long ago;
it was here before our time. (Ecclesiastes 1:9–10 NIV)
An expression that our children and grandchildren use is “Get a grip!” The context for using this expression is when someone is overreacting. He or she is out of touch with reality or needs to calm down. (We must say that the younger generation often directs the “Get a grip!” expression toward us, but it could often be redirected to them!) Using the typical phrasing of financial advisers and consultants, we would define “getting a grip” as “maintaining the proper long-term perspective.”
A grip is designed to help you handle an object or stabilize yourself when in a difficult spot. Here are five truths, or “grips,” to help you _handle the current challenging economy.
The preceeding may seem like an overstatement of the obvious. But in the late 1990s many Wall Street analysts and some politicians were fond of saying that we have entered a new era of uninterrupted growth. They believed that the Internet companies and other new technologies were leading us to a new plateau, leaving behind the old cycles of growth and recession.
Some have said that economic history is the wrong opinions of dead men. But we tend to agree with George Santayana who said, “Those who cannot remember the past are doomed to repeat it.” Historical norms _are not artificial restrictions. They are the normal way markets and economies tend to function. When the economy defies logic (in a positive or a negative sense), it tends to right itself. If it’s up for extended periods, then it will likely go down. If it’s down, then it will come back up.
A completed business cycle is the period from the peak growth through the lowest point, or trough, to the next peak. It is the term for the ups and downs. If you were born in 1945, then you have lived through nine business cycles. From 1854 to the present, economists have identified thirty-one business cycles.2
So grasp that grip. The U.S. economy has been down thirty-one times since 1854. That’s once about every five years on average. After each of those thirty-one downturns, it has returned to an upward growth cycle every time.
The current recession that began in March 2001 came on the heels of the longest economic expansion on record, from March 1991 to March 2001.3 The long period of good economic times spoiled us. It made the correction period feel worse, but there is nothing new under the sun.
The stock market also had an incredible run from 1991 to March 2000. Let’s say that Jill invested $10,000 on September 30, 1991, in large, well-established companies and $10,000 in aggressive companies focused on technology. Here’s how she would have fared:
Initial Investment Ending Value
at 9/30/91 at 3/31/2000
Large companies—growth $10,000 $46,5664
Smaller, high-tech companies—aggressive growth $10,000 $86,7915
Wow, markets certainly can go up! The combined total return for both investments was a whopping 567 percent for the entire period.
Let’s say that Jack saw how well Jill was doing. He wanted to get those same outstanding returns. But Jack didn’t understand that markets go both up and down. He thought the up period would continue indefinitely. If Jack invested $10,000 on April 1, 2000, in the same investments as Jill, here’s how he would have fared:
Initial Investment Ending Value
at 4/01/2000 at 9/30/2002
Large companies—growth $10,000 $5,6336
Smaller, high-tech companies—aggressive growth $10,000 $2,5637