It’s amazing what natural human optimism can achieve when Wall Street’s drumbeat of doom takes a break and we can all reset our expectations as investors. This week took us a step closer to that big beneficial reset.

Stocks have climbed up a healthy 15% in the past six weeks, bringing the market as a whole to the edge of what I’ve argued is the Fed’s unofficial limit. If the bulls can hold just another 1 percentage point against all the dread out there, we’ll have significant evidence that “animal spirits” have recovered from the last few years of binge and bust.

And in that scenario, next year will feel extremely good as the wreckage of the bear market recedes. The last eleven months of market misery have tested us all, but if you’re here reading this, your old-fashioned faith in the future has survived.

I’m not saying all the sailing from here will be smooth. It never is. There’s always a twist, a surprise, a shock waiting around the corner. But the market itself is telling me that the shocks are no longer quite so shocking.

More Than A Feeling

The VIX is called the fear index because it measures Wall Street’s lack of conviction. Left to their own devices, stocks don’t swing far from day to day or even from month to month. Big volatility requires big uncertainty . . . investors oscillating between hope and fear, relief and disappointment.

The pandemic opened up nearly three years of abnormal uncertainty. We went fast from a world in which everything felt relatively settled to one where just about anything could happen . . . and then, when doomsday was averted, the Fed started cleaning up the wreckage left behind.

We can see the effects on the VIX. Response to bad news has gotten less exaggerated, resulting in less severe volatility. When the Fed got serious, the fear index spiked to 38.94 . . . serious stuff, about as unsteady as it got back in 2011 when the credit agencies stripped the U.S. Treasury of its AAA rating after one debt ceiling fight too many.

Since then, every round of fresh tough talk from the Fed has knocked the market down and the VIX back up . . . a little less drastically each time. We’re building up resistance to Fed dread. Every rate hike becomes less of an existential crisis and more of an incremental drag that we can figure out how to live with.

Just look at the VIX peaking a little lower from shock to shock. In January, the fear index got as high as 38.94. February’s spike only managed to take it to 37.79. By June, all the Fed dread the market could muster barely took the VIX above 35.

Here we are now, having survived the latest storm with the VIX on the edge of dropping below 20 again. As long as this pattern holds, we have concrete evidence that the shocks are getting less shocking.

Of course, I would prefer it if the day-to-day tension would relax as well. The VIX bottomed out at 19.12 back in August, right before the Fed scattered the bulls. If we can see the fear index drop below that level, we can operate with a little more confidence that it’s gotten harder to rip the rug out from under the rally.

Normal Can Feel Good

And there’s a long way to go from there before the market mood reverts to anything like “normal.” In the long haul, a reading of 20 on the VIX is still a little elevated. It signals unease, controversy, churn.

We need the VIX to drop below 15 for an extended period to really know the market mood is back to normal. That hasn’t happened since the pandemic. The last three years have simply been too wild a ride for investors to plan coherently around the future.

I talked to a wealth manager last week who marveled that I could even remember back to 2019. After that, we’ve weathered a global pandemic that killed millions of people and shut down the face-to-face economy for months.

The world could have ended. I’m not shocked that the VIX surged to 85, which means investors thought seriously about the prospect that the stock market could move 85% from month to month.

That’s basically pricing in an end-of-the-world scenario or something like a 2008 crash that kills global financial institutions and reshapes the economy. After all, millions of people were getting laid off as businesses shut down. The social fabric started fraying like an old COVID mask.

The Fed took decisive action. Interest rates plunged to zero and trillions of dollars started flowing directly to U.S. households. Doomsday turned to euphoria, without any transition through rationality in between.

We effectively had to give up on measuring stocks on a realistic basis. Earnings and economic reports became meaningless because there was no way to chart progress or regress against the flood of cash. Just about every company on Wall Street flipped from apocalyptic fundamental collapse to something that looked like hyper growth worthy of Silicon Valley’s finest.

And the VIX only briefly got below 15 a few times last year before the euphoria faded and we started facing up to the reality left behind. A lot of stocks were overpriced. Some still made sense, but after years of simply going with the ride, Wall Street had forgotten how to tell the difference.

Three uninterrupted years of too much volatility can leave anyone feeling more than a little queasy, much like too long on a casino floor reacting to the flashing lights and loud machines as people hit jackpot and go bust.

Fundamentals help ground us in normal times. When a stock’s trajectory gets too far ahead of its operational footprint, it’s time for the bulls to step back. When the footprint surges ahead of the stock, the bulls swoop in with impunity.

There are no more pandemic excuses. While every tightening move from the Fed still acts as a drag on all stocks one way or another, the binary boom-or-bust era is over now.

Every quarterly conference call takes us closer to clarity on who the winners and losers of that era will be. Realistic investors want to overweight the winners and steer clear of the obvious losers.

The process of rotating toward the winners and away from the losers takes time. The big market indices will shift in the process as money flows and weightings change. We’ve already seen Big Tech stocks take a big step back to make room for Big Oil.

That’s going to continue. It’s normal. And the transition back to “normal” will open up big opportunities for investors who are already thinking in these terms.

One More Wall Of Worry

All we really need now is for the Fed to pause. That’s going to require real progress on inflation. The next gauge that really matters there comes next week.

I’m hoping it’s constructive. We’re all tired of inflation. Relief will feel good.

And if it doesn’t happen next week, there’s always next month. Sooner or later, the Fed will pause. In the meantime, rate hikes sting less and less as they build up in the system.

Here’s to the new normal. Here’s to the companies of the future. As I’ve been saying lately, the future is where smart investors need to live if they want to make real money.

You’re free to think of the future as inherently worse than the present. That’s when you work hard to preserve your existing capital from external threats: taxes, inflation, recession, doomsday.

But the history of Wall Street, much like the history of America, is a different story. The future has always been better than the past. Things have always gotten better for investors.

I am not convinced that story is over yet. If you truly believe American hard work and innovation have hit the rocks, I don’t think any portfolio of stocks can really help you.

I’m actually excited that the economy is finally strong enough to tolerate non-zero interest rates again, over a decade after the 2008 crash. This is where the future starts arriving. And it’s where real wealth gets created.