I’d say once a month for the past 4-5 years I’ve seen some variation of the following prediction:
We think there is now an increased risk for the possibility of an event similar to the 1987 Black Monday crash that saw stocks fall 20% in a single day.
Here’s a prediction you will never see from a market pundit:
We think there’s a possibility for a reverse-1987 melt-up as investors will all turn optimistic at the same time.
I’m not trying to say that a reverse-1987 could ever happen. But doesn’t that say a lot about the way we’re wired as humans? It’s perfectly reasonable for people to assume that we could see a 20% crash in a single day because of herding and panic in the markets. Yet it would basically be impossible for the herd to have the opposite of a panic in a single day and re-price the market to the upside. People have a very easy time defaulting to fear and it can happen in a hurry.
Yesterday our Director of Research, Micheal Batnick, posted a great chart on his blog that dovetails nicely with this idea:
Here he shows the largest gains and losses by decade in the Dow Jones Industrial Average, along with the length of time that each lasted. You can see the average gain far outweighs the average loss, but the interesting stat here is how quickly those average drawdowns occur. On average, the max gains lasted 4.5 times longer than the max losses. Gains are incremental, but losses happen in a hurry. Greed builds up slowly, but fear can happen all at once.
It could be a hangover from the financial crisis, but one of the things I’ve noticed in the past few years is the willingness of prognosticators to assume that our best days are behind us. Just yesterday I read an article from the CFA Institute with the headline: What If Markets Are Bound for Chronic Underachievement? Larry Summers and company have been talking about secular stagnation for some time now.
From a short-to-intermediate term perspective these types of forecasts probably make sense. It’s a good idea to reign in your return expectations after a run like we’ve had in the markets since 2009.
Still, I can’t remember the last time I read an article or saw an interview where someone made a prediction that the future is going to be better than the past. Maybe the only place in Earth right now making these types of claims is those in Silicon Valley. Can you think of any other group besides the tech crowd that actually thinks the future will be better than the past? It’s almost a minority viewpoint these days.
Maybe everyone in the world of finance is right. Maybe our best days are behind us and we’re doomed for decades of slower growth, lower returns and economic headwinds. It’s certainly a possibility.
All I know is that we have roughly 100 years’ worth of financial market history to go on. The U.S. has the largest, most mature economy on the planet and it’s only been operating under its current structure for a couple hundred hundred years. Anyone who thinks they can use the past to make sweeping generalizations about how the next few decades are going to play out in the markets or the economy is going to be surprised by how things actually transpire. There are far too many factors at play.
I’m not saying that growth in the economy or returns in the financial markets will be better than expected in the future. I honestly don’t know. All I know is that pessimism and panic don’t do much good either way.
The glass-is-half-full group in Silicon Valley has had a nice run as of late, so you’ll excuse them for making grandiose statements about how technology is going to make life better for everyone in the future. But I think one of the things that they get right is having an optimistic bent to their world view. It’s much easier to persevere in the face of failure when you have an optimistic view of the future. Giving up easily is a natural extension of a pessimistic worldview.
Of course there will be recessions and market crashes along the way. But I can think of far worse outlooks than being rationally optimistic about the fact that most people want to improve their standing in life. Here’s a prediction you’ll be hard pressed to find in today’s negatively-skewed society:
What if the future is better thank we think?
What if the Future is Better Than We Think?