Five years ago, BNP Paribas froze three of its funds after acknowledging their exposure to impossible-to-value collateralized debt obligations, marking what many believe was the start of the global credit crisis.
A lot of progress has been made over the half-decade since then. Stock markets have bounced back, companies are back to reporting record profits and volatility has subsided.
Yet, it is amazing the extent to which we are still wrestling with aspects of the crisis: The euro zone is on the brink of economic disaster, unemployment is very high, investors are still looking for a helping hand from central banks and the U.S. financial sector has been unable to approach its former glory.
Indeed, the fifth anniversary of the start of the crisis falls at a time when the world remains mired in it – and so observers continue to wrestle with what the next phases of the crisis are going to look like and how investors can navigate them.
In terms of how markets are likely to fare over the next two years, Capital Economics sees a sort of echo-effect, where what worked and didn't work over the past five years remains intact. That is, stocks and commodities will underperform, while U.S. government bonds deliver superior – if far more muted – returns.
"It is tempting to think that the real return from U.S. equities will be rather better than from Treasuries after the dismal performance of the last five years," said John Higgins, senior markets economist at Capital Economics, in a note. "But we doubt it."
Over the past five years, the average annual return for an index of seven- to 10-year U.S. Treasury bonds has been 7 per cent after adjusting for inflation – a spectacular run next to the negative return for the S&P 500 and commodities over the same period.
Mr. Higgins expects the return from bonds will average less than 1 per cent after inflation over the next two years. But that should still top equities, he believes.
"Profit margins are already very high and we think a turn in the earnings cycle lies around the corner," he said. "Meanwhile, the price-to-earnings ratio of the S&P 500 is well above its long-run average when measured on a cyclically-adjusted basis."
His thoughts are by no means unusual. Bill Gross, managing director of Pacific Investment Management Co., or PIMCO, declared in his latest investment note that "The cult of equity is dying."
In other words, the 6.6 per cent annualized return from stocks over the past 100 years can't be counted on any more in a persistent environment of below-average economic growth.
Just as ominously, John Lonski, chief economist at Moody's Capital Markets Research Group, reiterates in his latest note to clients that the Federal Reserve is essentially out of bullets in trying to prevent another economic downturn.
"For now, all the Fed can do is shore up a fundamentally weak U.S. economy and prevent the next recession from being as severe as the deep plunge of 2008-2009," he said. "If Europe deteriorates further and the U.S. goes off the fiscal cliff, the Fed may be capable of only softening the blow of an inevitable recession."
This isn't to say that the anniversary of the debt crisis should be marked with nothing but doom and gloom.
Curiously, U.S. housing – a key source of the global economy's current mess – is one of the few bright spots. It has been showing consistent signs of stirring from its state of depression, with home sales and prices nudging higher.
With any luck, these improvements will continue. As for marking the end of the financial crisis, though, that date still eludes us.
David Berman