This article was written by Julien Serbit, portfolio manager at Geneva-based Prime Partners.
Ten years ago, the equity market experienced one of the biggest crashes ever, with a spectacular sequence of consecutive negative monthly returns. The S&P 500 index – one example out of many – plummeted from a level of 1,286 at the end of August 2008 to 896 three months later, ultimately falling to 666 on 9 March 2009.
Some of the weekly returns during Q4 2008 were particularly disappointing and were evidence of the complete loss of confidence in the system (-18.2% between 3 October to 10 October 2008). The 'too big to fail' banks were under massive pressure, and we tend to forget that Citigroup fell from $557 per share at its top (the end of 2006) to just $25 per share 15 months later.
Thankfully, the real economy did not collapse completely, despite taking a significant hit. We can finally say that the global economic system has recovered, albeit with significant geographical differences in terms of timing, results and the number of years of austerity endured to get there. Nevertheless, it is hard to say with confidence that we have learned from our mistakes.
At first glance, we might be tempted to say that the situation has been handled well. Governments, central bankers, financial regulators and even banks have theoretically strengthened the system, while putting in place very accommodative financial conditions. This has resulted in the S&P 500 rising by more than 250% over the past 10 years and has induced the highest level of government debt ever on a global scale.
What's more, numerous transformational events have taken place over the past decade. Technology has been at the centre of these major changes and has allowed significant new trends to emerge. ETFs and algorithmic trading, which have come to the fore since 2008 and which are now widely used, are two examples of that.
It is undeniable that smartphones and the mobile internet have completely reshaped the way clients access financial services, and the fintech wave seems only to be in its early stages.
However, beyond equity returns and technological achievements, it seems as though we have failed to realign the development of the financial system with the needs of the real economy.
The next great upheaval will obviously hurt the global economy again, and no one can predict whether or not it will be more severe than 2008.
One major threat, among others, is speculative behaviour. Most of the time, investors and clients are not looking at their investments with a long-term perspective but over shorter periods.
This behaviour is causing financial markets to react more and more instantaneously (thanks to technology), creating a vicious cycle of yet more short-term speculation.
All in all, and without being a pessimist, I do not think that it would be rational to believe we will avoid another financial crisis. We will surely not repeat the exact same mistakes, but we will inevitably end up creating new traps to fall into.
Capturing quick profits will continue to feel more rewarding than preventing big losses by diversifying risk. Bitcoin and cannabis stocks are just two recent examples of this phenomenon. Ultimately, a good asset manager is perhaps the one who is able to rein in the human nature of his clients from time to time, while also resisting the lure of quick, easy money themselves.
At the end of the day, 2008 proved that capitalism's 'creative destruction' was far from efficient. The next crisis will certainly test this key hypothesis once again – of that I’m sure.