We are NOT experiencing the Crash of 1929! We are not perched on the edge of a depression. In fact, I seriously doubt if we will experience anything even close to the 2008/9 global financial crisis, when stocks dropped 52%. Larry Fink is the head of the gigantic asset manager named Blackrock. He said this morning that another 10% drop was “possible.” I think that is reasonable.
First, there is scant economic evidence that a recession is approaching. The U.S. economy is doing comparatively well. Furthermore, economic historians quibble as to whether the U.S. has ever imported a recession from another country. The point is that importing a recession from somewhere else is very unlikely to happen.
Second, our banking system and stock market practices are vastly safer now than 1929. Banks have never had such a large capital cushion before. Just try to get 90% margin in 2016! There may be a remote possibility that stocks go down 50% again, but it is even a more remote possibility that individual stocks would go down 100%, like in 1929. Besides, what happened last time that stocks dropped 50%? The market came back up over 200%.
Third, long time readers know I have no worry about recessions. They come, and they go. I do fear another financial crisis like 2008/9. If that happens, it will NOT develop here. We would have to import it from abroad, probably from China. If a larger financial crisis in 2008/9, which was based in the U.S., could only drive down our stock market by 52%, why are we so afraid of a smaller financial crisis elsewhere?
Forth, our investment psyche is not accustomed to geopolitical events in a globalized world. That causes us to over-react. The stock market was not wildly over-priced before this slide began. Still, investors are selling because they don’t understand the impact of a cold war between Saudi Arabia and Iran, as just one example. If the Clueless Wonder of North Korea really has an H-bomb, should we sell all our stocks? No, of course not!
We need to pull up our big-boy pants and start taking advantage of all these buying opportunities!