10 Years Ago This Week...
/It is hard to believe that 10 years ago this week marked the beginning of the global financial crisis.
On Sept. 15, 2008 the financial services firm Lehman Brothers filed for Chapter 11 bankruptcy. It remains the largest bankruptcy in history. At the time, Lehman was the 4th-largest investment bank in the world, with $600 billion in assets and 25,000 employees.
The main culprit was Lehman's exposure to mortgage-backed securities. Mortgage-backed securities are a type of investment where the investor is paid a return based on the reliability that mortgage debt holders will make their house payments. The financial firm (i.e. Lehman) essentially serves as the intermediary, whereby the investor is the one effectively lending the money to the homeowner, in exchange for the interest payments the homeowner makes against their mortgage.
Seems harmless enough, right?
As housing values rose in the 2000s, lending standards loosened. Prospective home owners with poor credit started being approved for mortgage amounts they could not afford. These riskier loans were dubbed "subprime" due to the higher default risk. Problems arose as mortgage-backed securities extended more and more to these subprime loans. It was a recipe for disaster.
Sure enough, just as the housing market cooled and unemployment spiked in late-2007, homeowners started missing their mortgage payments. Delinquencies led to loan defaults. A domino effect ensued, causing mortgage-backed securities to plunge in value. This led to the demise of many large financial firms, and ultimately, a collapse in the U.S. stock market.
It took nearly 5 years for the market to fully recover to where it had peaked in 2007. Since that recovery point in Aug. 2012, stocks have mostly continued to climb higher, although there have been some notable drops in the Summer of 2015 and early-2018. History suggests we are closer to the next recession than the last, but it will likely be a while given that stock prices remain near all-time highs.
In The Market...
The S&P 500 fell -1.0% last week. Let's look under the hood:
(price data via stockcharts.com)
It was a crummy week. In fact, it was the worst since June. But I suppose if a one-percent down week is the current definition of "crummy" then in the broader context things are pretty good. Both stocks and bonds were broadly down. Our Technology position got dinged pretty good, although our Utilities position was up more than +1.0%.
The losses in the bond market are noteworthy, mostly due to how quiet bonds have been the past few months. Something to watch in the coming weeks.
In Our Portfolios...
What's New With Us?
I watched the Seahawks lose a frustrating game, in between a lot of yard clean-up. A pretty uneventful weekend for me, but it is nice to have football back.
Have a great week!
Brian E Betz, CFP®
Principal