The 1990s through the early years of the 2000s are remembered as a time of tremendous economic growth. The investment indices climbed steadily throughout these years, dipping in 2003 and 2004 before rising modestly again in advance of the credit crisis and financial institution failures of 2007 and 2008.
Looking back through history, the market has been in a steady rise and fall pattern that wavers only in the height of the rise and the amount of time required to recover from a fall. The type of investments traded — from the innovative to the traditional — have influenced markets and wealth throughout the United States and beyond. Here are a few of the trading trends from the 1990s to the 2010s:
Bull Market of the 1990s
Bull markets are defined by rising stock prices over a sustained period of time. All through the 1990s, and into the early 2000s, the bull market made a record-breaking run of 4494 days; during that time, the S&P 500 didn’t experience a single day where the index decreased by 20%.
A bull market is driven by revenues created by the demand for goods and services, the amount of profit reported by businesses, and the price to earnings ratio. Bull markets are often times of intense economic growth and a general increase in prosperity across many socioeconomic groups in the United States. The bull market of the 1990s was fueled by strong economic performance, low unemployment, and high confidence from consumers and businesses.
With new technology, the forex market became more accessible to the public. Individual traders received the ability to trade currencies through the internet in 1995, which was previously limited to only large financial institutions.
Dot-com Burst and the Recession of 2001
A stock market drop in the early 2000s, partially due to what we now call the burst of the dot-com bubble, sparked a brief recession in 2001. The recession was worsened by the uncertainty about terrorist activities in the United States after the attacks on the World Trade Center in New York City on September 11, 2001.
The stock market drop that helped lead to the recession was a result of what was known as “Y2K.” Y2K was a scare that computers and other electronics that were purchased in the 1990s would not work once the calendar flipped from Dec. 31, 1999 to Jan. 1, 2000. Though the fear was ultimately unfounded, it sparked a rush on computer purchases that created an increase in investment for high-tech companies. Investors were investing in high-tech companies regardless of their profitability or past performance, creating a “bubble.”
The investment “bubble” for these type of companies burst, causing a couple of years of bear markets and a brief recession. Bear markets are defined as falling stock prices over a sustained period. By 2003 and 2004, the markets had largely recovered to their pre-dot-com burst levels and continued to grow until 2007.
Financial Crisis of 2007
The financial crisis of 2007 and the resulting two-year bear market was an early warning sign to the much larger financial crisis of 2008. It was caused in part by the subprime mortgage crisis and the use of derivatives.
The subprime mortgage crisis was the result of banks offering mortgages to credit-risky borrowers in order to meet the demand for mortgage-backed securities. Mortgage-backed securities are a type of derivative investment. The mortgage-backed securities, flush with mortgages lent to risky borrowers, were picked up by investment trading mechanisms such as hedge funds.
When the housing market slumped, defaults occurred on mortgages, and those defaults began to affect investors who had invested in mortgage-backed securities.
The effect was felt in all corners of the economy, and particularly in the financial sector. The resulting bear market was declared in the summer of 2008 and lasted through early 2009.
Financial Crisis of 2008
The financial crisis of 2008 triggered the worst economic crisis in the United States since the Great Depression. Though the United States government tried to shore up floundering mortgage holders and banks in 2007 and 2008, they didn’t fully understand the depth of the issue.
The mortgage-backed securities were not confined to the financial sector; mortgage-backed securities could be found in pensions, mutual funds, and corporations too. When the housing market crashed and mortgages went into default, the effects of those defaults hit individuals and business who were invested in the derivatives.
The banks who held the subprime mortgages began to panic. They recognized the losses they would need to take to absorb the defaulted mortgages, and quickly began to mistrust other banks. No bank wanted to end up with defaulted mortgages as collateral. The resulting downward spiral resulted in what is now known as the Great Recession.
Bull Market of 2009 to Present
The bull market of 2009 to the present day is the second-longest running in history.
Looking to the past has a way of setting expectations for the future. While markets in the United States have risen and fallen throughout history, they continue on an upward trajectory, buoyed by innovation and opportunity.
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