Credit crisis dissipates


With each passing week, March 17th looks more and more the bottom of the current stock market bear market (peak to trough, the S&P 500 fell 19.7%, the NASDAQ and most international indices fell over 20%.)  Although US economic reports are generally weak, many showing the worst values since 1991, the rate of decline has leveled off.  It's no surprise that housing statistics are terrible, with prices and volumes continuing to fall through 2009.  Consumer and business confidence levels are deeply gloomy.  Despite that, US export driven manufacturing surges as the dollar remains 20-25% undervalued against major currencies.  The risk of competition from overseas manufacturers (e.g. China) should not be underestimated, but the US still has the largest manufacturing sector of any economy, focusing on high value products such as MRI machines, while other countries produce commodity products such as toys or even personal computers.

What could happen over the next three years?

After 5 months of chills and spills, we're able to push back from the daily volatility and think "big picture." In terms of magnitude of losses (anywhere from $300 billion to $900 billion, depending on the estimate used) and how rapidly the crisis unfolded, this crisis was unprecedented.  However, if we look back over 40 years of US economic history, we see that a major crisis occurs on average once every 4 years.  We well remember the October 1987 stock market crash and the "Tech Wreck" of 2000-2002, but how many remember the Penn Central bankruptcy of 1970 or the Mexican Default Crisis of 1995?  Yet, in hindsight, we see that investors who bought stocks when the situation looked grimmest made significant profits over the next three years.