It doesn’t seem that long ago but the day that Lehmann Brothers collapsed in 2007 will go down in history as the day the ‘financial dam’ broke. It triggered the GFC into full swing and some 4 years later we are still trying to clean up the mess. If you look back to the US economy in the aftermath of the GFC, it could only be described as a basket case. High unemployment, low economic growth, very high government debt, falling house prices, mortgage defaults and bankruptcies were all features of the economic environment at the time (and what’s changed I hear you ask?).
"Can I buy some shares in the US market?" This wasn’t a question I heard too many people asking in 2007/08. About the same number of people asked the question in 2009/2010 and 2011. Compare that to the Australian experience over the last few years since Lehmann Brothers. We just missed having a recession while the rest of the world was struggling, unemployment was low, inflation and interest rates were rising (a sign of a strong economy), government debt was relatively low and the economy continued to grow. Not a bad time to invest!
The differences between the 2 economies could not be more stark and interestingly enough the difference between the returns on the 2 share markets are equally as dramatic...but not for the reasons you may think.
Let’s look at the numbers. On October 9 2007 the main US share market the S&P 500 (top 500 companies on the US market) peaked at 1565 points. In March of 2009 the S&P 500 bottomed at 676. A fall of over 56% which when combined with an anaemic economy it was hardly surprising no one wanted to buy US shares. The Australian market has similar results with the S&P ASX 200 peaking at 6828 in November 2007 and subsequently falling to 3145 in March of 2009, a fall of nearly 54%.
The interesting and quite staggering point is what has occurred since. The S&P 500 stands at 1344 points (at the time of writing) while the S&P/ASX 200 is 4251 points.
The US market is some 16% off its peak. 16%!!!! Given the state of the US economy this is a staggering result. Whilst the Australian market is still 60% below its peak. Yes 60% and this is from the standout economy in the western world with a set of economic numbers which are the envy of many countries.
The reasons for this are too many and too debatable to cover in this blog, and it’s too simplistic to draw too many conclusions from this analysis, but the one lesson we can learn from this is a crucial one....Share markets and economies are not the same thing and don’t always flow in the same direction. Most economic data that is produced is backward looking and often out of date (and then seasonally adjusted). Whilst share markets are forward looking and consider where the economy is ‘going’ to be rather than ‘where’ it’s been.
Most of us tend to base our investment decisions on the here and now. Of course being an expert in hindsight doesn’t really help anyone but I think this is a great reminder of 2 important points: firstly diversifying your investments remains important and secondly write off the US at your own peril! The US economy is still the biggest in the world and remains a very resilient economy.
*Image by Alex E. Promios via Flickr