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Taking Stock: Ten Years Since the Global Financial Crisis, Part 1: Then and Now

October 31, 2017 / by Christopher Levell, ASA, CFA, CAIA, Partner

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A decade ago, disaster was looming over the financial world. In this post, the first in a series, we look back on the Global Financial Crisis, aka the Great Recession. We will also examine how past experiences are pertinent to the present and future.

This month, 10 years ago, the Standard & Poor’s 500 Index peaked. Fast-forward to today: the S&P 500, a key barometer of market sentiment and economic health in the US, is hitting all-time highs again.

To be sure, market peaks can signal a pending downturn. That said, we can only really tell in hindsight. The S&P 500 has posted 178 record highs from March 28, 2013 to October 27, 2017. At some point, we will look back and see when it truly peaked before a trough. For now, the extended economic expansionary cycle in the US—one of our key market themes—suggests that markets may have more room to grow.

Looking back, there were other mixed signs in October 2007. Housing prices had actually been in decline for over two years. The Fed Funds rate, at 4.75%, was declining as the Federal Reserve, led by Ben Bernanke, was attempting a soft economic landing. The Volatility Index (VIX), Wall Street’s fear gauge, had risen from a record low in January 2007, underscoring increasing concerns around the economy. At NEPC, we were gearing up for our 2008 actions for clients, which would lead to our most succinct advice ever: “Reduce equity exposure.”

While we see some parallels to today’s markets—notably the highs of the S&P 500—most other indicators are different: 

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The recent robust performance of US equities may spook investors who are still haunted by the events of a decade ago. Still, fundamental conditions are different enough to support the current low-growth environment.

NEPC encourages investors to prioritize actions that impact long-term strategy, while acknowledging current conditions. We suggest harvesting outsized gains in US equities and high-yield bonds by rebalancing to policy targets. While we expect US growth to continue, we recommend an overweight position to non-US developed market equities, based on their greater upside in the current environment.

Stay tuned for our 2018 outlook, and more to come on the lessons of the Global Financial Crisis.

Topics: Research, Taking Stock

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