The worst corporate earnings projections since the lockdown depths of the pandemic era. The biggest bank failures since the Lehman Brothers crash. The worst year for stocks since 2008. You’d think it was the end of the world.
But despite the market reporters having to flip back more than a few pages in the almanacs to put Wall Street’s current predicament into a historical context, I can’t help but think the comparisons aren’t exactly helpful or useful.
They aren’t useful because there’s usually a pretty steep statistical cliff separating the current environment from historical extremes. The “worst earnings since COVID” claim, for example, initially looks scary.
We all remember how fast earnings cratered in the spring of 2020. It felt apocalyptic, unreal, unsurvivable.
Three years later, things are worse for Corporate America than they have been at any other moment in the intervening time. This will probably be the worst quarter since 2Q20, for good reason.
But what that means is that the S&P 500 is on track to give us 6.4% less profit than it did a year ago. These companies are clearly moving in the wrong direction, even before you factor in inflation.
However, they aren’t imploding en masse, as you might reasonably think if you only saw the “worst since 2020” comparison. As it turns out, earnings across the S&P 500 dived 43% year over year in 2Q20. We are a long, long way from living out that doomsday scenario again.
Do something similar every time you see a “worst since” comparison. Get actual numbers. Usually, the current moment is nowhere near as extreme as the reference suggests . . . the language that should scare us is really “as bad as” or “worse.”
Nobody can legitimately say the current economic environment is as bad as the lockdown crash, much less worse. Likewise, nobody can legitimately say the biggest bank failures since Lehman Brothers are anywhere on the same level as what we saw in 2008 or even that interest rates are fatal here approaching the highest level since early 2001.
Silicon Valley Bank was a long way from too big to fail. We know this because three months after its implosion, we’re all still here talking about the market. The biggest since Lehman Brothers was far from an extinction event.
While interest rates are a drag on the economy, they’re a long way from the 6.5% that “maestro” Alan Greenspan insisted we deserved between the dot-com crash and the September 11 attacks. Absolutely nobody on Wall Street expects we’ll go back there in the current cycle.
The rate environment is not going to get “as bad as” it was in 2000-1. It is not going to get worse. At the most extreme, a few people think the Fed will need to tighten another 0.50 point by the end of the year.
That’s roughly where overnight rates hung out for most of 1997 and 1998. But it wouldn’t scare anyone to say rates are as bad as they were in 1998, would it? It wouldn’t generate any clicks.
It wouldn’t give investors that jolt of anxiety and fear that keeps us off balance and reacting on instinct. After all, most of us can concede that while high interest rates and declining earnings and bank failures are not constructive, they are clearly survivable.
We survived every single historical comparison. Stocks took a little time to recover their equilibrium and then moved back up again. Every single time.
Wall Street just survived the longest and most savage bear market since the 2008 crash. Economists think we’re facing the most severe recession since the Great Recession, blowing past the brief COVID recession along the way.
That sounds scary too. But other than the short pandemic swoon, there hasn’t actually been a formal recession since 2008. The more accurate phrase would be more like “the only” extended recession since 2008. Not the worst. Not the longest. The only.
And when you only have a few data points, every comparison becomes a little empty. Out of a pool of four recessions in the last two decades, what we’re facing now might ultimately fall somewhere in the middle. That’s not extreme.
Remember, we’ve already survived every one of those historical recessions anyway. It got bad. It didn’t get bad enough to kill the market.
If you think this time is somehow different, my question stands: what has changed in the American character in the meantime? What broke? How have we failed?
Because without a compelling answer, the only logical conclusion I can draw is that the American character hasn’t faltered. As a nation, we’ll survive the current set of challenges just like we’ve survived everything else history can throw at us and gotten stronger in the process.
I’ll have to conclude that you’re the one who has changed. You’re tired of the uncertainty. You’re worn out, ready to get off the market rollercoaster and seek something a little calmer.
I get it. Wall Street is not for everyone. But think back to all the “worst since” comparisons you’ve already lived through. We got through them, didn’t we?
And we learned from them. The Fed learned what causes a 2008 crash. They’re never going back there. They applied what they learned to the COVID environment and avoided big bank failures or a credit crunch.
They made mistakes each time, of course. But any landing you walk away from is a teachable moment. Future policy moves will be even more sensitive, even more nimble and even more effective.
Likewise, corporate leadership is not operating in a vacuum. They’ve learned from every crisis. Years of trade war, supply chain constraints, pandemic, rate pivots, inflation and the occasional recession have made good companies more nimble than ever.
Good companies will bounce back. When they stop being good companies, you sell them. And here’s another historical comparison to ponder: the S&P 500 hit a 52-week high today.
Stocks are worth more than they were at any time since last summer. And the market as a whole is now less than 9% from all-time record territory.
That doesn’t feel like the end of the world, does it? Because it isn’t.