Financial advisors seeking to calm the fears of worried clients are frequently turning to history lessons.
“This downturn is nothing new,” said Bob Sawyer, managing director of Trinity Investment Services, Gulfport. “This has happened two other times in our lifetime.”
Sawyer, who is master certified in demographics, said the downturn in the economy is linked to a sector of the population reaching its peak in spending. Generations come every 40 years, and every 40 years there is a contraction in the economy when a generation reaches the peak of spending, turning from spenders into savers. Sawyers said that happened in 1929, 1969, and now in 2009.
“We expected this to happen,” Sawyer said. “The only difference is we didn’t expect we would see contraction this soon. It is so simple if you understand consumer spending. When the average age of a certain generation is 48, they become savers, not spenders. Spending drives the economy. This happened to Japan. They have been in a downward spiral since 1989. They may be coming out of it when we start to go in it again.”
Sawyer believes that the stock market will come back, but for only a short period of time before going into “the great winter,” a downturn in the economy that could last as long as 12 years.
“It could be very, very rough,” he said. “When the downturn comes after the first quarter of next year, good, quality government bonds, AAA-rated corporate bonds and the strong municipal bonds are all good investment options for the long winter. You will get a slightly better yield in a non-treasury bond, but make sure you choose well. It wasn’t that long ago that General Motors was considered investment grade.”
Sawyer said in 1929, the Henry Ford generation reached a peak in spending that caused the Great Depression. The Bob Hope generation reached a peak in spending in 1969, and adjusted for inflation the Dow lost more than 70 percent of its value. As 75 million baby boomers reach their peak in spending next year, the economy will continue to contract.
“But it is a little different this time,” Sawyer said. “Forty-seven states have unfunded pension liabilities for their state retirement programs, including Mississippi. In June 2008, the Mississippi retirement system had assets of $19.7 billion, and as reported Oct. 1, it was down to $17.6 billion. From Oct. 1 through now, the S&P is down 26.24 percent. From that I would assume they are down another $3.2 billion. That means they are down about $5.3 billion since June. You already had unfunded liabilities of about 30 percent. So what happens there? What are you going to have to do? You have to raise taxes so police, teachers and other state employees get their retirement.”
Some investment advisors are saying that buying into the stock market is actually less risky today at 8,200 than it was when the Dow was at 14,000. Stocks are a better value. But Sawyer thinks any rally will be short lived.
“I am not going to tell you, ‘Let’s just sit and it will get better,’” he said. “It is not going to get better. It is going to get worse. It is going to get much worse. We will have an upswing in the next 90 days, a bear market rally, but don’t get your hopes up afterwards. It’s called the perfect storm, and it is now happening. The world is not coming to an end, but if you study demographics and understand consumer spending, it will help you understand how to protect the future. People don’t like to hear negative news, but everyone is going to suffer in the downturn.”
His advice is to move to bonds when times are tough. Then, when conditions improve, you move back into stocks.
“You can be prepared for these types of downturns,” Sawyer said. “You can understand how to systematically invest in long-term fundamental trends, and that is all that Warren Buffet does. It is so simple and predictable.”
Stacey Wall, president & CEO of Pinnacle Trust, also talks about the history of the U.S. financial system to assure customers that the process is solid.
“In my early years in the investment business, close to 30 years ago now, I spent a great deal of time reading about the history of the financial markets — especially the times of turmoil,” Wall said.
Contact MBJ contributing writer Becky Gillette at email@example.com.