The author is the Vice President of Psagot Mutual Funds
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After an economic period of over a decade in which the world got used to a zero interest environment, the global economy is adopting a new-old reality, and many of us – even those with more than a decade of experience in the capital market – are not familiar with such an environment. The last time the interest rate was at a rate similar to today was in 2008, over 13 years ago.
Looking back, and looking at the behavior of the economy and the indices, a lot can be learned from history, which knows how to repeat itself and surprise even the skeptics.
In the early 1970s, the world energy crisis broke out, the price of oil soared to a new high, the world economy recorded a slowdown and inflation in the US jumped from 3.4% in 1972 to 12.3% in 1974.
As a result, the stock markets recorded sharp declines, and the S&P 500 index fell in 1974 by 26.5%, a year later, in 1975, the index rose by about 37%.
Even in the early 2000s, when the dot.com bubble burst, companies from the technology sector fell by tens of percent, and their value was cut by approximately 1.75 trillion dollars. The technology crisis did not pass over the S&P 500 index, which in 2002 shed about 22.1%, but the correction was not long in coming, and a year later investors began to take advantage of the opportunities created in the market, and the S&P 500 rose by about 28.7%.
And many also remember the year 2008 – the global economic crisis, which some say was the biggest crisis since the Great Depression in the USA of the 1930s of the last century. The global financial sector found itself in a storm, which eventually affected other sectors and led to aggravation The crisis, which is also accompanied by a financial crisis.
The S&P 500 lost its value in 2008 by 37% in one calendar year, and what happened a year later, you guessed it, the index corrected sharply upwards, about 25%.
One of the most dangerous phrases for investors in the capital market is “but this time it’s different”. By the way, in all the years we reviewed, you can find senior economists who made the same claim and in retrospect were wrong.
The story you often hear now is that when the interest on deposits is high, then there is no reason to invest in stocks. Here, too, history shows otherwise and it can be seen that the public is flocking to deposits after declines of about 20% in the markets, just as happened at the end of 2008, when the Bank of Israel interest rate was 2.5% and the public invested NIS 20 billion of its money in bank deposits.
The rationale that guided those NIS 20 billion was to invest in a solid and stable channel, and at that point in time the investors’ decision was based on the past performance of the stock markets. This decision may have seemed right, but in the test of the result it turned out to be a honey trap, since in many of the bank deposits the price of interest is the lack of liquidity, which becomes more important than ever for taking advantage of the opportunities in the markets.
Back to the present time, the year 2022. Interest rates are rising, inflation is cooling down but not enough, indices are falling, and in recent weeks the main headlines that caught the eyes of investors were that billions of shekels are flowing into financial funds and bank deposits.
The S&P 500 index is currently in negative territory, and since the beginning of the year it has weakened by more than 20%.
Is it possible to learn from history and act in a similar way to previous crises? Can we conclude that great opportunities have been created and new money will begin to flow into the markets, and next year we will see the world’s leading index again in positive territory?
It is hard to say at the moment, but it is safe to say that the world economy always aims to grow in the long term, and a slowdown or crisis, as we have reviewed, has often been seen as a great opportunity, more than a danger.