This time last year, stock markets were in an uncontrollable tailspin. The six weeks that followed the collapse of Lehman Brothers saw almost 30 per cent wiped off the value of the UK's biggest companies as bewildered investors watched the complex web of the bank's deals unravel.
The credit crisis had gathered such strength it caused the collapse of one of Wall Street's oldest and most respected institutions. This acute phase of the crisis rocked the foundations of finance. Investors watched to see which institution would fall next. Chief executives and policy makers collaborated day and night behind closed doors to catch the next pillar before it toppled. Trust evaporated; lending froze and for many companies, a distant financial crisis quickly turned into a local funding crisis which led to a personal solvency disaster. There seemed to be no end to the destructive power of the storm and the very principles of Western free markets were questioned.
The financial crisis caused one of the most abrupt, severe and widespread recessions of our time. Right around the world, banks stopped lending, businesses stopped investing, consumers stopped spending and factories ground to a halt. In response, world leaders leapt to action and poured billions of pounds into the financial system.
But what a difference a year makes. Investors have the scent of recovery and are driving markets to around the same level they were before Lehman Brothers collapsed (though they are still some way off their 2007 peaks).
And they are right to be optimistic. Germany and France are already out of their recessions, the US and UK's central banks believe they are past the worst and after a brief pause for breath, China has resumed its relentless march towards economic superpower.
The financial recovery seems well underway: market volatility is easing; corporate borrowing is on the increase; and bank lending, while still tricky for some businesses and individuals, is improving.
It is these positive indicators that have hauled sentiment off the canvas but only a very brave investor would drop their guard so soon after a near knock-out; other measures of recovery are mixed.
Unemployment is still rising, threatening to choke the fledgling recovery before it draws its first breath. As long as people are still losing their jobs, or fear losing their jobs, consumer spending will remain subdued. The good news is that the rate of job losses is slowing which usually means we are close to the peak in unemployment.
And measures of the industrial recovery are also mixed. The price of raw materials essential to power industry and construction such as oil and copper have stuttered since the crisis.
To cast further doubt, some people believe the huge sums of money used to revive the world's economy will inflate a new bubble; inflation. If economic growth remains weak, but inflation rises we enter a destructive phase of the economic cycle called stagflation. Through such a period, the economy would make the same progress as you or I wading through treacle.
The authorities charged with keeping the inflation genie in the bottle, central banks, are conscious of this, but most likely see a little inflation as a fair price to pay for avoiding a depression which would be akin to wading through quick sand.
Such a confusing picture suggests parallel universes exist. In one, we are over the worst of the crisis and on course to return to something most investors would consider to be normality. There is plenty of evidence to back up this theory.
In the other universe, the crippling public and personal debt burden, combined with the other lasting scars of the financial crisis such as high unemployment and a dysfunctional banking system will see this fledgling recovery perish before it takes flight.
The way to reconcile this paradox is to remember that the economy and investment returns never rise in smooth, uninterrupted lines. They both work in cycles with good and bad years. While the short-term signals seem to be fairly well balanced in the optimistic (bullish) and pessimistic (bearish) camps, there are many reasons why investors should remain optimistic about the longer term and keep their faith in financial markets.
As a student, the chances are that you have time on your side. This affords you the luxury of taking the very longest view. Investments you make now will have years, even decades to play out. The last decade has been unkind to many investors who watched their shares inflate during the dot.com bubble only to watch them fall as that burst. The financial crisis has had a similarly devastating impact on their investments.
But a study of share returns over more than a century shows that there are several other long periods of sideways movement such as during two world wars, the Great Depression and the inflation shock of the 70s. These periods are followed by long periods where shares resume their upward trend as a new driving force emerges like the explosion of US consumerism between the two World Wars; post-war reconstruction and a second phase of globalisation in the 1980s and 1990s.
The catalyst this time could be an acceleration of the evolution of technology in business; the development of the so-called BRIC economies of Brazil, Russia, India and China where billions of aspiring, socially-mobile consumers live; or possibly a Green Revolution as industry and day-to-day life adapt to more sustainable practices.
Without doubt, the financial crisis has left a lasting impression on the world. For years to come, the investment landscape will be framed by the impact of the crisis. But for all the pain suffered over the past two years, there is still every reason to keep the faith in investing and I believe those who do will, in time, be rewarded.
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