As of July 2022, things are not nearly as bad as in 2008.
The main problems we experienced in 2008 stem from banks getting carelessly greedy with their loans. When people started to default, the bottom fell out. People lost their homes, and businesses had difficulty making large bank transactions.
Looking at some key indicators, people in 2022 are not having as much trouble with debt. First, we can look at consumer debt compared with economic output. While total debt has risen, so have wages and productivity. When factoring in all three, consumer debt is lower now than in 2008 as shown in the chart below.
Second, we can consider the number of people late on their debt payments. Once again, people are better off in 2022 than in 2008.
One other fear is that stocks are too expensive. Fundamental investors look at the projected earnings of companies. One helpful measure is the price-to-earnings ratio. We can think about the number of years it takes a company’s profit to cover its stock price. Considering the S&P 500, in 2008, that ratio was about 33. In 2022, it’s closer to 18. (Lower is better.) There have been some uncertain times in the pandemic, but now, the valuations appear to be more stable than the height of the financial crisis.
What is risky about 2022?
There are still some risks to investors in 2022. (Risk never completely goes away.) There are some areas of concern to keep an eye on in 2022.
Global instability
As mentioned in a previous post, China and Russia’s policies continue to threaten global markets. This threat is still real.
High levels of corporate debt
Companies are financing more today than they have in the past. Historically low-interest rates partially drive the rush to borrow. Still, some analysts fear that companies that should have gone out of business are kept afloat by a constant stream of borrowing. They call unprofitable investments relaying on financing zombie companies.
Collapsing Cryptocurrencies
Cryptocurrencies are experiencing their miniature financial crisis right now.
Most cryptos and crypto-brokers lack the regulations that stock issuers and brokers have to face. That means investors have fewer protections.[1] Now is a good time to reevaluate if your investments in crypto were really for lasting future value or more closely resemble a Ponzi scheme.
[1] This isn’t meant to imply that stocks are completely safe. There are some bad stocks in the world and some people who will try to get around regulations. In reality, not all investments can be classified as safe or unsafe based solely on their registration status.
Disclosures
The information in this material is intended for the recipient’s background information and use only. It is provided in good faith and without any warranty or representation as to accuracy or completeness. Information and opinions presented in this material have been obtained or derived from sources believed by Dimensional to be reliable and Dimensional has reasonable grounds to believe that all factual information herein is true as at the date of this material. It does not constitute investment advice, recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. Before acting on any information in this document, you should consider whether it is suitable for your particular circumstances and, if appropriate, seek professional advice. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorized reproduction or transmitting of this material is strictly prohibited. Dimensional accepts no responsibility for loss arising from the use of the information contained herein.
This material is not directed at any person in any jurisdiction where the availability of this material is prohibited or would subject Dimensional or its products or services to any registration, licensing or other such legal requirements within the jurisdiction.
Risks
Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.