"In the investment business, there is enormous pressure to deliver positive news. Trust me, good news sells better. Stockbrokers and investment firms thrive on it. Going out and discussing badly overpriced markets and downside risks is an invitation to get fired. They simply don't want to hear it..." — Jeremy Grantham on Charlie Rose, March 11, 2013.
Grantham, a renowned value investor, famously lost half of his investor base after refusing to buy into the tech bubble of the late '90s. However, he was ultimately proven correct when the NASDAQ fell by nearly 80%.
Today, there are once again two prevailing theories about the economy:
1. Common Theory: Rising interest rates have slowed things down a bit, but the economy is generally healthy and more resilient than expected. Inflation will eventually come down, and the Fed will likely lower rates, resulting in either a soft landing or a mild slowdown. Overall, things seem pretty good.
2. Alternative Opinion: The effects of rising rates haven't fully impacted the economy yet. It takes time for these changes to play out. The current period of seemingly little impact has created a false sense of confidence. Like a structurally flawed dam, pressure is building slowly. Most won't realize anything is wrong until the final tipping point when the dam breaks.
Are there any historical patterns supporting the alternative thesis?
1. During the 2008 crisis, there was a long lag between the cause (rising interest rates) and the effect (recession). The Fed began raising rates from a low of 1% to a peak of 5.25% by the summer of 2006. However, it took roughly another 18 months before the official start of the recession in January 2008. Even then, few realized we were in a recession. The stock market remained near historic highs, and it took another 12 months before it reached its bottom in February 2009 (down more than 50%).
2. In the late '70s and early '80s, runaway inflation led Fed Chairman Paul Volcker to raise rates from 10% in mid-1980 to a peak of 19% by early 1981. However, it still took roughly 9 months before the recession began in summer 1981. The stock market reached its bottom in the summer of 1982, falling more than 30%.
3. A long lag between interest rate hikes and the start of a recession has occurred in every recession since 1954. The stock market is a lagging indicator of recessions, not a leading one.
Assuming average lag times from previous recessions, the recession may not begin until October 2024, with the stock market reaching its bottom in fall 2025 (30-40% decline from today). FOMO traps may occur as the market rallies and dips on its way down.
Remember, markets don't always go up. Economic downturns follow monetary tightening. Maintaining a long-term view amid headlines and social media hype is crucial for successful investing. FOMO, or the lack thereof, separates great investors from the herd.
