Daily Update: Been Up So Long Everything Feels Like Down?

The negativity is palpable. Every day, it doesn’t feel like it matters whether the news is constructive or destructive, good or bad for Main Street and Wall Street alike.

Stocks go down either way, with only scattered surges in between. Every headline looks like a problem.

Is it time to give up? Be careful before you respond. I’m not talking about 2022. I’m talking about 1989.

Back then, investors who cheered one of the greatest bull markets on record had lost their nerve. Every rally felt like a sucker bet, a chance to sell out before the inevitable crash to come.

The ones who cashed out shielded themselves from a legitimate 20% bear market. But the downswing was relatively brief . . . 16 weeks after hitting bottom, the S&P 500 was back in record-breaking territory.

And after that, if you recall, we were well and truly set up for the greatest rally in history. Those who retreated in 1989 needed to scramble in order to buy back in and avoid missing out entirely.

Now market history never repeats exactly, but the cyclical “rhyme” here makes a remarkably compelling argument that hope is most valuable when it’s in short supply.

Sentimental Supply And Demand

Back in 1989, my career on Wall Street was still in the early phases. It was a trial by fire . . . because a lot of senior people left the business after the 1987 crash, leaving the rest of us to soldier on.

Clients were doing great on paper, despite the shocks. They were up 17% a year across the trailing decade and 1989 was on track to expand their wealth by another 25%.

But nobody was happy. Black Monday cracked their confidence. After that, all they could see was the threats. The market kept going up, but it didn’t feel real.

They couldn’t trust it, much less believe their good fortune. Yes, the Fed was raising short-term interest rates (hitting a now-unimaginable peak of just under 10%) and yes, the yield curve was inverted, with bonds paying less than bank accounts throughout the period.

And yes, inflation was a real pain point throughout the period. However, while everyone was forecasting a recession ahead, the economy kept powering forward until mid-1990.

All that frustration turned into apathy. Watching the market wasn’t fun any more. Reporters stopped trying to explain the random fluctuations and individual investors, with Black Monday seared into their memories, weren’t paying attention anyway.

Ultimately, that apathy is what triggered the bear market that stretched into early 1991. Stocks that could overcome any obstacle crumpled when traders stopped cheering.

Sound familiar? As much as I hate to say it, a frothy market needs to shake out the weak hands now and then to let the rest of us get back to work.

Like Warren Buffett says, the time to get greedy for stocks is when everyone else is scared . . . or, to embellish a little, not paying attention. When fear is everywhere, greed is the best long-term strategy.

It’s basic supply and demand, only translated into the market’s emotional dimension. And in my experience, frustration emerges when the mood is ready to flip.

Investors get frustrated when their assumptions stop working. Stocks quit behaving as expected. And when either an excess of hope or dread hits a wall, the initial response is usually to swing in the opposite direction.

Hope turns immediately into fear. Greed becomes dread. In the pivot, asset prices move fast in reverse.

That’s how the bear market of 1990 played out. Frustration built up to the point where only an outside shock was needed to bring the curtain down hard on an ebullient decade.

A generation later, few remember a specific trigger or even recall that particular bear market move even happened. After all, it was a long time ago now and the recovery was extremely quick.

Some point to the invasion of Kuwait. Guess what? Oil prices surged 135%, inflation spiked 2 percentage points and investors tired of volatility gave up.

Short Bear, Long Bull

Hope was in short supply in 1990-1, but then again, fear itself was exhausted three months after the Kuwait invasion. And then hope took over again, taking stocks back to record levels in that 16-week period I mentioned earlier.

After that, life presented plenty of twists, but the bulls stayed mostly in control of Wall Street until the dot-com crash nearly a full decade later.

Someone who defied consensus and bought the 1989 peak would have needed a year of courage before the profit clock started. Like now, we focused on squeezing money out of stalled markets by trading short-term cycles and using options as leverage.

But that phase didn’t last long. The calculations quickly shifted from “am I ever going to stop losing money here?” to “how high can we go?”

Wall Street worked hard in the 1990s. It flew by fast. And while that first year was a grind, the rest of the decade gave even the most basic index fund investors a chance to quadruple their money.

Then, of course, the dot-com bubble burst and 911 brought the era to a sudden halt. The decade that followed wasn’t as easy as the 1990s or even the 1980s.

You couldn’t set your positions and forget them any more. Modern markets move faster and require more focus.

In a lot of ways, we all became day traders in that decade, pivoting in search of a smoother long-term ride. It’s no longer easy . . . more of a grind.

But hope ultimately keeps winning. In general, history favors the bulls. Bull markets are longer and give us more than bear markets take away.

That’s just how the world works. Stocks can only drop 100% before they hit the downside limit, but they can triple, quadruple and go even farther on a long enough timeline.

While it was rough sailing between the dot-com crash and 2012-13, traders who bought when stocks were in decline and sold when they were rising ended up wealthier than when they started.

Then, from 2013 to the end of 2021, even a buy-and-hold investor stood to triple their money simply from buying the S&P 500 at the beginning of the period and holding on through all the shocks, controversies, frustrations, pandemics and disappointments along the way.

The last decade was pretty good in terms of raw numbers. Investors made a lot of money. Did it feel good, or are you exhausted?

If you’re tired of winning against the endless walls of worry, it sounds to me like you’re living out a version of 1989. That’s all right.

I just don’t want you to miss out if the coming decade shapes up more like the 1990s. If we keep our money working on the best strategies available on every day the market gives us, the odds are pretty good that we’ll come out ahead.