I read an article in Time magazine that pretty much sums up the palpable fears that many people are feeling today. Here’s an extended quote from the story:

If America’s economic landscape seems suddenly alien and hostile to many citizens, there is good reason: they have never seen anything like it. Nothing in memory has prepared consumers for such turbulent, epochal change, the sort of upheaval that happens once in 50 years. Even the economists do not have a name for the present condition, though one has described it as “suspended animation” and “never-never land.”

The outward sign of the change is an economy that stubbornly refuses to recover from the recession. The current slump already ranks as the longest period of sustained weakness since the Great Depression. That was the last time the economy staggered under as many “structural” burdens, as opposed to the familiar “cyclical” problems that create temporary recessions once or twice a decade. The structural faults represent once-in-a-lifetime dislocations that will take years to work out.

Among them: the job drought, the debt hangover, the banking crisis, the real estate depression, the health-care cost explosion and the runaway federal deficit. “This is a sick economy that won’t respond to traditional remedies,” said Bank of New York Mellon economist Norman Robertson. “There’s going to be a lot of trauma before it’s over.”**

Sounds timely, you say? So it is—except that the story ran in September 1992. The recession that prompted those words felt real enough then, just as the economic tsunami that hit the world economy around a year ago was also real. Who can forget the market collapse of September 2008? That was pretty scary: after all, credit markets are the economic equivalent of blood flow to the brain.

But strangely enough, despite that cataclysm and the dire predictions of more to come, the stock market and many parts of the credit market decided to defy the pundits. From the low points reached last March, things have rallied by some 50%. Maybe this is because the manufacturing sector has been on the way up for eight months now, housing sales are going strong, financial institutions are repaying their bank bailouts, and housing starts are showing some life. Whatever the reason, for once the pessimists seem to be confounded.

Of course, panic is never hard to come by in the financial markets—and we’ve had lots to panic about in the past year. We all fear loss much more than we hope for gain, so panic tends to sear itself into our minds. The pressure to sell rode that enormous wave of panic. At the pit of the crisis, there was enough money on the sidelines to buy the entire market capitalization of Canada and the U.S.—all of it in treasury bills earning less than one percent.

That’s why most of the continuing pain is being felt by investors who sold their investments at the bottom, and are now stuck with the results of that decision. Catastrophe did not engulf us all, and the markets bounced back. Yet many investors face the prospect of either staying on the sidelines (presumably hoping that the world DOES go to hell in a hand-basket), or else re-entering the markets at greatly increased prices.

Don’t get me wrong: there’s still a long way to go before we reach a full economic recovery. Governments are still running huge deficits, and still plan to use our tax dollars to mop up their mess. They also have to back off from their fiscal stimulus efforts at some point, or inflation will raise its ugly head again.

So there are still any number of things that could trigger the next bear market. I’m saying that if history is any guide, the next bear market will end just as this one will—unexpectedly, and sooner than most people thought possible.

Alan MacDonald is an investment advisor with Richardson Partners Financial Limited. Alan helps investors with over $500,000. of assets make smart decisions about money. For more information please visit www.alanmacdonald.ca or email Alan at Alan.Macdonald@RichardsonGMP.com.

Richardson Partners Financial Limited is a member of CIPF.

References

** Gwynne, S.C./Washington, McCarroll, T./New York, McWhirter, W./Detroit, Woodburry R./Houston. “The Long Haul: the U.S. Economy”, Time Magazine, September 28, 1992.