History has demonstrated that markets go up and down on their way up. Studying a chart of the long-term performance of the S&P 500 or the Dow is interesting and informative.
There’s a lot to learn by studying a chart of what happened in the past. But studying the ups and downs is quite different from living through the ups and the downs. Living through market fluctuation can be an emotional experience. It can be scary and it can be exhilarating. The week after those planes hit the towers in 2001, the week of Lehman’s bankruptcy in 2008, the first three weeks of March of 2020 were scary times.
On the flip side, there’s 1999, when the NASDAQ soared more than 85%. And how about 2020, after the market bottomed on March 23 and then rocketed up 70%* by year-end? Those were some heady times.
Having lived through a few market cycles, we’ve noticed that the popular press and even the business press tends to print what best sells to an emotional reader or viewer. When the market is going up, media coverage is usually positive, leaving an investor to feel that things are good and going to get better, and if you aren’t jumping on board, you’ll be left behind. When the market is going down, media coverage is usually negative, leaving an investor to feel that things are bad and going to get worse, and if you aren’t jumping ship, you’ll be left for dead.
Said another way, media fans the flames. And we humans are sitting ducks for this! Admit it, it strikes hard and close to home when you are already a bit anxious/antsy/upset about the market being down 15% and you see a headline shouting, “Former Fed Chair Warns Investors of Crash!” It happens all the time, and we humans eat it up! Here are a few examples.
*S&P 500 from 03/23/2020 trough to 12/31/2020
|Feb 1, 2011||The Stock Market Is More Overvalued Than It’s Been In A Decade, by Doug Short, Insider||1308||176%|
|Mar 19, 2012||Kass: The Market Is Overvalued, by Doug Kass, TheStreet||1410||156%|
|Nov 20, 2013||
The Stock Market Is Overvalued, by Dan Dzombak, The Motley Fool
“The DJIA and S&P 500 are hitting record highs, stocks are overvalued, and low to negative returns are ahead. Investors should be prepared.”
|Jan 22, 2014||
Overvaluation: The Evidence, by Buttonwood, The Economist
“It is not just the Shiller price-earnings ratio that shows the market is overvalued.”
|Oct 4, 2015||Market History Is Calling, And It’s Saying Stock Performance Will Be Crappy For Another ~10 Years, by Henry Blodget, Business Insider||1987||82%|
|Aug 16, 2016||Here’s How You Know The Stock Market Is Hugely Overvalued, by Mark Hulbert, MarketWatch||2178||66%|
|Mar 21, 2017||A Record Number Of Investors Think This Market Is Overvalued, by Jeff Cox, CNBC||2344||54%|
|Oct 4, 2018||U.S. Stocks Are Dangerously Overvalued: Time To Buy The Emerging Markets, by James Berman, Forbes||2901||25%|
|July 31, 2019||Yes Stocks Are Overvalued. But By How Much? Here’s What History Tells Us, by Ben Carlson, Fortune||3016||20%|
|Aug 18, 2020||U.S. Stock Market Hits Record 77% Overvalued, by Mike Patton, Forbes||2913||24%|
Be wary of those experts! They are educated, credentialed, and respected but like you and me, they can’t see the future. And in many cases, they turn out to be flat wrong! Of course, when there’s always someone calling for a crash or a rally, someone will turn out to be right. Even a broken clock is right twice per day, as they say. And after the fact, our lucky expert will be celebrated and profiled as “the investor who called the crash.” No one will read about the majority of experts who got it wrong. So before you get wound up after hearing an expert’s dire prediction, remind yourself that it’s just another guy’s guess about an unknown future. Stick to your long-term plan and you’ll be fine.