A Look Back at the Market Dislocations of my Lifetime

By Marc Usem

Looking back at the market dislocations and economic shocks that have occurred during my lifetime may provide some guidance for what may lie ahead.

I was an internet industry analyst prior to the 2001 dot-com crash. I was very familiar with the weaknesses in the tech sector – the buildup of phantom companies and unearthly valuations. Refusing to help finance the dot-com fantasy, I left the industry. The subsequent fallout was breathtaking, but necessary, to flush out the excesses and over-exuberance. Massive wealth destruction took place, especially in technology, as valuations reset lower. But it laid the base for the next long leg higher for stocks. Diversified portfolios recovered.

I stood at the base of the World Trade Center on 9/11 when it was hit by a passenger jet. The financial and human risks were truly unknown. While massively life changing for some, the government reacted quickly and the overall economic impact dissipated before long. For most people, life returned to normal in just a few short months. For others it never would, but the world did not stop. It too, laid the groundwork for better days and reinvestment.

As a hedge fund manager, I experienced 2008 and the resulting fallout of the financial crisis. I understood the imbalances and potential risks, which were severe. I saw an entire industry collapse in a week as credit markets seized. Billions evaporated as unexpected financial risks were uncovered and financial excesses were exposed. Our country barely avoided the worst outcomes due to the hard work of global central banks. It could have been much worse. But we turned around with government assistance and new regulations. Financial excesses were reset, expectations lowered, and the base was created for the next decade of expansion. Diversified portfolios recovered.

Today, after a decade of powerful stock market gains, we face another crisis with new and different challenges. However unlike 2001 or 2008 the calculus is somewhat better known. While it may not seem so today, there is light on the other side of this pandemic. There will be a remedy and vaccine in time. This is temporal in nature – terrifying in the midst of it, but it too will pass. The world will not end. Valuations will be reset and we are in the process of setting the stage for the next move higher as massive pent up demand will be unleashed. Diversified portfolios will recover.

How you prepare to weather this storm depends on your unique situation. For those withdrawing cash – work with your advisor to make sure you have enough cash set aside. For those in saving mode - keep investing if you are able. You will be buying stocks “on sale.” If you are lucky enough to have extra money you don’t need, consider buying the dip. But if not, reconsider stressing your financial plan this year and scale back for a bit if necessary. Focus on your family needs and try to reduce stress. Each person’s situation will be unique.

Sharpening our sense of priority today will benefit all of us in the long term.