O’Sullivan Wealth Management Investment Update - Looking back

Jan 07, 2019 | Kevin O'Sullivan


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...The 1987 record breaking crash occurred in the middle of the last secular bull market. These periods of volatility test our resolve, but time and again we are shown that the markets recover and move forward to higher levels...

I graduated from high school in 1979 in Fort Lauderdale, Florida. My parents were living in the Bahamas at the time, and it was common for us expat kids to attend boarding school. Though I was mostly unaware at the time, the economy was defined by a prolonged period of stagnation, combined with inflation. This vexing combination at the time earned the name “stagflation”. It frustrated economists and caused Jimmy Carter to be a one term president, despite being one of the more intelligent people to occupy that office.

 

During 1980, while I attended a Liberal Arts college in St. Petersburg, Florida, I remember watching Ronald Regan being elected. A girl who was also watching the election results turned to me and a friend of mine who were not really paying that much attention, and accused us of not caring about this man who would usher in a new era. She was quite correct.

 

1981 to 1984 found me in Fairfield, Connecticut, as my father had been transferred to New York. I came home from University one day to find my father with a full glass of wine, at about 3pm, in the middle of the week. My surprise at seeing him was clarified by the fact that he had been let go from his position - laid off, terminated, fired. Interest rates had peaked stratospherically, as the economy rolled over in 1982. He had been a casualty of restructuring.

 

He thumbed his nose (or likely used some other less eloquent gesture) at the corporate world and retired to wine county in the Okanagan Valley. Who could blame him?

 

I moved to Calgary in the fall of 1984 looking for a job with a crisp University certificate, just after Trudeau Senior brought about the National Energy Plan effectively eviscerating the oil and gas industry in Alberta. I arrived to a city resembling a frozen ghost town. All that was missing was tumbleweeds blowing down the streets that were lined with shiny new office towers – mostly empty.

 

By 1987 Calgary had regained a pulse and the global economy in general had kicked into gear. The stock markets had delivered a string of strong years. Then one Monday night in late October, I met up with a group of runners (who used running as an excuse to drink more beer) for a Halloween run. It was indeed a scary night, as the Dow dropped 22% that day. This one-day record setting market decline had caused wide-spread panic. Interestingly a few months later the markets had made a full recovery.

 

1990 found me working in Calgary for a New York based company. The recession hit, and this time I was let go. I collected the handsome commission cheque that was owed to me and headed west, as young men should.

 

I entered the investment industry with ScotiaMcLeod in January of 1991. There were 6 people in my training class, down from around 40 in previous years. The instructor looked at his meagre group of charges, and proclaimed to us that this must be the bottom of the market. Bob Guilday, who has long since passed, was a veteran of many markets and knew of what he spoke.

 

We watched the invasion of Iraq, and the markets soar. As rookies, we looked wide eyed at each other but got to work. T-Bill deposits were paying 10%, it was easy to call on those. But clients would soon be lamenting that they could only get 8% for 5 years.

 

In around 1995 we were provided with desk top computers, with a platform called Microsoft Windows. People were beginning to talk about technology, and Nortel Networks was emerging as the Canadian tech star.

 

1997 brought the Asian flu, with Canadian bank stocks down 50%. I remember sitting down with my clients in their home on Vancouver Island trying to explain why their investment was down, and trying to convince them that they should buy more. They were far from happy with me, but they went along. It took two years for the bank stocks to recover – it turned out to be the buying opportunity of a lifetime for the banks.

 

Over the course of 97-98 the Asian crisis spread around the world causing the spectacular collapse of Long Term Capital Management. The staggering losses incurred by LTCM still cause investors to flinch, and forever tainted the term “hedge fund”.

 

But the bad news was not done yet, as the tech frenzy was well underway with the dot-com craze. This would continue for several years, despite investors looking behind the curtains only to find hamsters running on wheels, if that. The Y2K threat of extinction added to the tech obsession, until one day it all stopped. Nortel peaked at $124, with analyst targets shooting for $150, and went all the way down to zero. It was joined by many “tech” cohorts on the way down. But, on the other hand, Microsoft and a lot of other innovative companies in technology, and other industries, are still around today and have made investors considerable sums of money.

 

The period from 1980 through to 2000 marked one of the longest bull markets in history. The S&P 500 started 1980 at 110, and by the end of the year 1999 the index finished at 1,425. That marks an increase of 1,315 points or an almost 12 fold return. An investment of $10,000 in 1980 would be worth almost $120,000 20 years later. Or $ 1 million would be worth almost $12 million.

 

The markets then went through a secular bear market from 2000 through roughly 2009, with another secular bull market beginning in roughly the same year.

 

As we can see, secular bull and bear markets can run for many years. During these periods, markets can experience significant volatility – the 1987 record breaking crash occurred in the middle of the last secular bull market. These periods of volatility test our resolve, but time and again we are shown that the markets recover and move forward to higher levels, as the economy continues to grow.

 

We are now in the midst of another long term bull market that began in 2009. Yet again we are being tested by significant market volatility. But it is also true that we are seeing values that we have not seen for 12 or 18 months. The markets will recover and move higher. Meanwhile, we are presented with a buying opportunity at levels that are at a low, if not at the lowest point, that we have seen in over a year.