The Lost Decade

NEW YEARS EVE 1999

I remember New Years Eve 1999 as clearly as if it was yesterday. I can recall the palpable energy and buzz that surrounded us, as our country was entering the New Millennium. Arguably, the United States of America was at the peak of its power, militarily, politically, and certainly economically. The country had experienced close to 20 years of uninterrupted growth and soaring stock markets, book-ended by the 8-year presidential terms of Ronald Reagan and Bill Clinton. We were enjoying peace and prosperity and on that evening of 12/31/99, most Americans were ready to party.

AN IMAGINED DISASTER

Americans always need to be worried about something, and “Nervous Nellies” as well as opportunistic entrepreneurs, were warning us of a potential “Y2K” disaster scenario of epic proportions. The Y2K fears, if you don’t recollect, resulted from the concern that computer network systems, including worldwide networks, would not recognize or fail to reset to the year 2000. The consequences of this failure we were told, could be a shut down of all power, air traffic control, banking, government, water and utility systems. The most concerned among us hunkered down and prepared for the worst, stockpiling supplies, and even withdrawing life’s savings, in some cases.

For most of us, though, the more practical concern of the day was which New Year’s Eve party to attend… It seemed there was a millennium blowout party at every corner, and no limit on the available cash to fund over-the-top festivities.

When I entered the room at around 11:50 pm at the last of three parties I attended that night, I was literally mobbed by revelers wanting to talk financial markets. At that time, the stock market, as measured by the S&P 500 had soared an average of close to 15% a year over the previous 20 years (still hard to believe) and people holding glasses of drink in their hands seemed to enjoy nothing more than talking incessantly about their ballooning portfolios with financial professionals.

To be honest with you, while I enjoyed the attention and adulation I received in those days, the reality of the situation for me can be communicated to you by how I categorized about 80% of the people that sought my company. I would mentally divide my cocktail hour fan club into two units, calling one unit the “Whachuthinks” and the other unit the “Letmetellyous”. The Whachuthinks, would as you may imagine, ask me questions about individual companies they wanted to speculate on, i.e., “What do you think about this one and that one?” Many of the companies I was being asked about were brand new DOT-COM start-ups, I had not even heard of and about which precious little was known. The “Letmetellyous”, would corner me and proceed to brag to me about all the astonishingly successful trades they had made in their on-line trading accounts, i.e., “Let me tell you about this tip I received and how much money I made on it.” As you might imagine, my goal at parties and functions I attended at the time was to avoid eye contact and any and all conversations with the “Letmetellyous” and to hang in there for a respectful amount of time, or as long as my energy would last, with the free advice seeking “Whachuthinks”.

CRACKS IN THE PAVEMENT

The truth be told, 1999 was not a very easy year for responsible and thoughtful financial professionals. While the tech stocks were soaring, with many doubling in value over that year, the progress of the rest of the market was slowing, as investors were selling solid dividend paying “old economy” stocks for “new economy” technology and “dot-com” stocks. As I doggedly continued to advocate the wisdom of and need to keep portfolios diversified, many clients were putting enormous pressure on us to sell all value stocks, in favor of investing in new start-up Internet companies. Many of these had little revenue and no profits what so ever.

The Fed, beginning to sense that the economy was over-heating and that speculators were driving the market to unsupportable levels, began raising interest rates in the second half of 1999. While rising interest rates raised concerns about profit growth of traditional companies, it did little to cool off the buying frenzy taking place in the tech sector.

On Super Bowl Sunday in January 2000, a full one-half of all the thirty-second advertising slots available on TV were purchased by 17 different Internet start-ups paying $2.2 million for each slot!

Let’s return to my New Year’s Eve party in 1999. The clock strikes midnight, we ring in the New Year, and I then run outside to check the horizon for “Y2K” problems and signs of a global melt-down. The lights are on as far as I can see, the air is calm, there are no sirens to be heard, and all seems well in South Florida. The Nation is at peace, the economy is in a surplus and growing, the Y2K disaster has been averted and much of the country parties until dawn.

Following the mother of all New Year’s Eve partying, we entered a new millennium and a new reality. The market peaked in March of 2000, followed by the tech/internet collapse of 2000-2. While “old economy” stocks held on to much of their value in 2000-2002, this provided little relief to most investors, who had abandoned that sector during the Tech stock hey days of 1999. In late 2000, the Nation was practically torn apart at the seams by an historically contested presidential election. Any traction gained after the matter is settled, was quickly lost when the planes hit the buildings on 9/11/2001. Our country went to war; the economy sank into deficit and recession. Alan Greenspan and the Fed then pumped up the economy by lowering interest rates and keeping them down throughout the decade. While the nation climbed out of the recession and stock prices climbed again fueled by the real estate industry, we know now where that was heading, don’t we indeed. The resultant sub-prime mortgage debacle and real estate collapse lead to a global financial panic. Financial Armageddon was narrowly averted, but the damage was done, and is being felt acutely by most businesses and too many laid-off workers.

Finally, when investors look back at the last ten years of market performance, they find that they have experienced a historically unprecedented “lost decade” with at best, negligible returns over the 10 year period.

NEW YEARS EVE 2009

As we move through the final business quarter of 2009, we find the country in a very different spirit and mood then 10 years earlier in 1999. Americans are more cautious and somber then in the halcyon days of the last century’s end. Many Americans have lost their jobs or businesses and feel overwhelmed by financial pressures.

While there will certainly be New Year’s celebrations around the country this year, they will be toned down and much less exuberant then they were at the decade’s start.
But on the other hand, on a much more optimistic note, I ask you this. Would you rather be at a 1999 party with the champagne flowing freely, but with our country about to face one of the worst 10-year periods in its history? Or would you rather be standing at the cash bar at a 2009 party, holding a light beer with the knowledge that while the country currently sits at the bottom of the barrel economically, things are beginning to look up? I believe from an historical perspective there is no doubt that you are better off at the 2009 party, eating fried chicken wings rather then caviar, but with the knowledge that the probability of future success has turned up sharply for the 2009 investor or entrepreneur.

In fact, after being treated like just another guest at parties over the last few years, things are beginning to change for me. With the stock market rebounding strongly, I am beginning to draw some fans again at cocktail parties. To be perfectly honest, I was starting to miss the “Whachuthinks”, and once in a while over the last couple of years, I even listened to a few “Letmetellyous” without losing my patience. So if you happen to spot me at a party in the future, don’t hesitate to come over and say hello. The calm and rational stock market conversations people are now engaging me in, are actually much more enjoyable then those of 1999, fueled as they were by the rampant, irrational exuberance of the time.

Until next time,

Austin A. Frye, MBA, JD, CFP®

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