With stocks currently at extreme valuations and still close to ATHs, let’s take a walk down memory lane and debunk a few myths along the way.
In particular, let’s focus on the GFC from 2007 to 2009 (see chart below). Even though it was incredibly painful, you can see that from a historical and statistical perspective, the GFC wasn’t as bad as it could have been or should have been.
Myth #1: The lowering of interest rates stopped the market decline. This is easily debunked. The bear market officially began in the beginning of October, 2007 and found a bottom in March, 2009. The Fed had already started lowering interest rates steadily from August, 2007 to December, 2008, with stocks losing value along the way.
Myth #2: Quantitative Easing (QE1) immediately stopped the market decline. This is also easily debunked. The bear market officially began in the beginning of October, 2007 and found a bottom in March, 2009. The Fed began QE in November, 2008 while stocks continued to decline for four more months. By the time stocks bottomed in March, 2009 the Fed already had $1.75 trillion in bank debt, MBS and Treasury Notes on its balance sheet. This was back when almost $2 trillion dollars was considered a lot of money.
Do you know what finally stopped stocks from crashing?
The suspension of FAS Rule 157 which required banks to value their assets under “mark to market” accounting methods. Stocks finally found a bottom on March 9, 2009. The suspension of Rule 157 by the FASB (Federal Accounting Standards Board) had been publicly discussed for weeks, and under intense pressure by Congress, the FASB finally caved and voted to suspend the rule on April 2, 2009.
So when you see people here saying or implying the lowering of interest rates or increases in liquidity via QE always translates to better stock performance, understand that either through ignorance or intentional misrepresentation, they may be misleading you.
