Scanning the latest financial headlines, you may feel that the current financial environment may not seem quite as dire as it did a few weeks ago. There’s still talk of economic slowdown in the fallout of the recent banking issues and closures, but that comes alongside headlines touting consumer resilience and an uptick in home sales.
Unless there’s poor banking news or other adverse events, in the coming months there will likely be times of calm in the markets and even possible rallies. During those times, many people will think that we’re out of the woods—but while anything is possible, that’s not a foregone conclusion.
As history has shown, issues in the financial system can play out over a long time—and if that’s the case once again, it may help to be prepared.
The 2008 Financial Crisis didn’t happen overnight.
People often remember the Global Financial Crisis as a sudden and unexpected event, but it was more like the boiling frog that didn’t realize the water was slowly being heated. From the first signs of subprime mortgage problems, it took a full year and a half for the market to crash.
Take a look at this chart of the main events leading up to the 2008 Financial Crisis:
S&P 500 Index Jan 2007–2009
The timeline of a few of the major events went something like this:
• On April 2, 2007, Real Estate Investment Trust (REIT) New Century filed for Chapter 11 bankruptcy, becoming the first victim of the subprime mortgage crisis.
• Several months later, Bear Stearns had to bail out two of its funds.
• Another four months later, the S&P 500 Index still rallied to a new all-time high.
• Almost a year after the subprime issues began, Bear Stearns failed.
• The following month, the S&P 500 still rallied 15%.
• Six months after Bear Stearns failed, Lehman Brothers collapsed.
• 17 months after the subprime mortgage issues surfaced, the S&P 500 finally plummeted.
Another potential indicator that a recession was on the way was the bond yield curve. In 2006, two years before the Financial Crisis, that curve inverted, meaning short-term bonds were providing higher yields than long-term bonds. For the last year (2022), the yield curve has once again been inverted.
In other words, financial crises don’t always happen overnight, even though they often seem to arise suddenly.
There’s no way to know for sure when the next financial crisis will begin—or even whether it has already begun.
As I stated in a recent post on the global banking system, many Americans are concerned about their deposits, though most of the world’s biggest banks are thought to be secure in the aftermath of the recent bank closures and buyouts. But risk still exists, especially for smaller or regional banks.
That’s not to say that the banking system is where the next economic crisis will originate—or even that we’ll see another crisis like the Great Recession in our lifetimes. But what it does tell us is that market and financial uncertainty can be persistent, especially as many Americans are constantly on the lookout for the biggest threats to their and their loved ones’ financial well-being.
Economic uncertainty doesn’t have to be frightening. With a proper diversification strategy, you can help protect your wealth.
Markets rise and fall over time—this is natural and should be expected. So even though we can’t ever say for certain what the future will hold, knowing that some level of uncertainty will always exist can actually be helpful in guiding our portfolio strategies.
For example, since markets tend to fluctuate over time, diversification has become the gold standard for building a portfolio. By allocating portions of a portfolio to multiple asset classes and multiple assets within those classes, we can reduce our overall risk exposure and hedge against a drop in any one market.
This is why so many Americans turn to gold and other precious metals as power diversifiers. Gold has served as a store of wealth for thousands of years and has historically been seen as a hedge against market uncertainty and volatility.
In the coming weeks, we may see markets rally and financial headlines bring back talk of a “soft landing” as the Federal Reserve works to quell high inflation. But even in a period of economic growth, it never hurts to be prepared for the next bump in the road.