Looking at history we have a tendency to see certain events as inevitable, but they didn’t seem inevitable at the time. We can agree now that the tech boom of the late 1990s was destined to crash, but the crash didn’t seem inevitable to most of us while we were living through the boom. This provides a lesson for our present difficulties.
As is often the case, the truth is somewhere in the middle. We are too confident in our ability to see the reasons behind past events. But we also have too great a tendency to believe that our present situation will persist.
Many believed that the tech boom would continue indefinitely taking us to a glorious new future. This turned out to be very wrong. On the other hand, many of us now see the tech crash as inevitable. However, another plausible outcome could have been for tech stocks to remain flat for 20 years while their value caught up with their prices. The markets have more than one way to get back in line.
History tells us that the stock market runs in cycles and that good times and bad times don’t last forever. However, while we live through events, there is a tendency to believe that “it’s different this time.”
There are many reasons we can give to explain why the current stock market drop really is different this time. China and other emerging markets will eat our lunch. We’re running out of oil. Global warming will change everything. Crushing debt will kill the US economy. Canada is tethered to the US and will be dragged down as well.
I just don’t buy into the idea that stock market underperformance will be a permanent part of our future. I look to the past and see that things will eventually turn around. I can’t say when, though.
A few years after the economy improves, we’ll have many reasons why it was inevitable that the turnaround happened when it did. We’ll just as wrong then as we are now in thinking that the decline is permanent.