Are You better off than You were Five Years Ago?

Are you better off than you were five years ago?  The reason I ask is because this period between 2007 and today is the thermometer guiding the emotions of most investors.

Five years ago, the world had spent six years recoiling and reacting to 9/11, an event that certainly changed the world.  Leading up to this time, we had enjoyed and were caught up in the excitement and thrill of the Technology Bubble.  The euphoria was felt by all as risk was not even given a minute of thought in the boardrooms around the world.  It was all about accelerating growth.  Yet, the bubble burst in 2000.  Then the easing by the Federal Reserve following the 2001-2003 recession - that free money to encourage everyone to buy cars and new houses and financial institutions to finance unsound leverage on anything - took over.  Add to all that, the emergence of China and the new thirst for growth, and 2007 was a period when the stock market was tied to a spirit of a world hungry for recovering.  That was 2007.

In October 2007 the total net worth of the stock assets in US stocks was $15.938 trillion, and by March 2009, those assets had been devastated to a value of $6.772 trillion.  That SHOCK really appeared to be following the path of 1929-32 and it was most certainly the biggest economic shock since the Great Depression.  I am a big believer in Ben Bernanke's wisdom and efforts to keep the SHOCK from turning into a repeat of the Great Depression, as he has continued that fight for these last three years.  But getting back to my description, the stock market rallied back strongly in 2009 and made a peak in early 2010 as the dooms-dayers started painting a picture of a double-dip recession.  That failed to occur and some relief started once again in late 2010, but then in 2011, the ominous economic stories started to take over the headlines once again.  That passed in late 2011 and the stock assets continued to climb to a higher high, but here were are again - in deep despair.  The battle of the last five years has worn out our resolve and our nerves are frayed.

So how do consumers feel today?  Well just take a look at the evolution of Consumer Confidence in the chart below.



















That peak dates back to before 9/11, and you can see the slight blip in these last 3 years, but the latest data shows another relapse.

Now here were are in 2012.  So are you better off today than you were five years ago?

All in all, we've been painting a picture since early February that the trading sentiment had become overextended, as our Psychology Composite moved to P5.  Furthermore, we believed that the stock market could ebb and flow for the following 6-7 months as the Presidential election cycle ran its course.  Yet, that was in February, and now in June, we are "ebbing," and Friday's action was part of that process we believe.  We also have our Psychology Composite in a healthier P3 zone, and very, very close to moving into the P2 zone.  It takes market distress to get emotions back in that healthy "Wall of Worry" environment and the last few weeks have resurrected that stress.  We're still there.


The very strong conditions of our Valuation and Monetary Composites is about as close as you can get to a very bullish picture for the long-term.  Psychology is very importatnt too, but it is more volatile and often describes shorter-term expectations.  The short-term still has to be worked through, but already the picture is improving as all three of our pillars are now in the green zone (as you can see in the image above).

It has been a rocky five years, and a lot of lessons have been taught by all of the distresses that we've faced.  Now let's see how many of the lessons learned are converted into positive actions.  Either way, the stock market will continue to show that progression of learning.

Don Hays

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