We fool ourselves if we ever think that we can foresee the future but some times are murkier than others and now certainly fits that bill.

My test for this is to think back on the last week, the last month, the last five years and consider all of the major things that have happened and how unlikely it is that anyone could have predicted many of the major developments.

People do not like to think that they have limited visibility into the future. It’s especially important when we have our investment hats on that we realize the limits of our knowledge and act accordingly.

An investor must be an optimist or else they would not invest. They must believe that the future is brighter than the present, that there will be inventions and progress that will generate returns to those who make their capital available to promising ventures.

But just as surely an investor must realize that bad things happen to good people and investors should control what they can control and weigh risks carefully before deploying capital.

Applying my test and going back five years to late February, 2020, we were on the verge of the biggest global health crisis in a century. For the first time a huge chunk of the modern economies was deliberately being shut down. We were in the final year of the first Trump Administration. Russia had not yet invaded Ukraine, artificial intelligence was a term, not a “thing,” and cryptocurrency had not yet reach trillion-dollar status.

That spring of 2020 was a time of great fear. People were hunkered down to avoid the deadly disease and the stock market declined the furthest in a short time – by nearly half in less than a month – of my nearly half century career on Wall Street. The collapse of economic activity was the greatest in a short time since the Great Depression of the 1930s. In one week alone, more than 10 million people lost their jobs; a week unlike any in American history.

Over the next several years more than one million people died at least in part because of Covid 19. We will never know the exact total and defining a Covid death is remarkably difficult but we can be confident that it was a lot. Despite this towering loss, the economy and the stock market bounced back much, much faster than most serious observers thought possible.

On March 23, 2020, the Federal Reserve announced that it was coming to the rescue and that marked the bottom of the bear market. The stock market sprang to life before the epidemic had barely begun to exact its grisly toll.

A friend asked me for my prediction of when the economy would start rebounding and I predicted by Memorial Day. In retrospect, ludicrously wrong. And yet not too long afterwards the economy began to respond.

One of the biggest surprises for me, while I was still in hiding in a secure location, was that most people decided this was a great time to buy a new house and the housing market had one of its greatest surges in history.

Another, perhaps even bigger surprise, was that policymakers got their economic responses quite close to an optimal mix. Shutting down a massive economy and then trying to bring it back to life was largely unheard of and no one really knew how to respond. The Federal Reserve was as aggressive as it ever gets and Congress and the Administration shoveled large piles of money at the problem.

Despite the great unknowns, these leaders came unusually close to the proper response. Looking back, it’s clear that they went a bit overboard and triggered a several year surge in inflation. But the risk of falling short was far greater and a shortfall in stimulus could have resulted in a severe recession or depression that could have lasted decades.

Widening our scope to take in the last two decades, it’s clear that people are still traumatized by the mortgage and financial crisis of 2007-2009 as well as the Covid economy and its aftermath. The response around the world to the aftershocks could lead to a third trauma. We have no idea what this third trauma could be but trying to regain your footing after some big stumbles can be quite difficult.

Policymakers are grasping at solutions to what appear to be difficult to define problems. Nearly every major country and alliance has taken major initiatives — perhaps gambles – and no one can be certain that they are even attacking the right problems. The global upheaval seems at least on a par with the scale of change we normally see after the end of a major war or some similar big event.

Most Americans believe the country is on the wrong track. It’s impossible for them to believe that the U.S. has emerged from these two decades of turmoil in better economic shape than just about any other major country. By most measures, the U.S. economy is in as good a shape as it’s been for a half century.

The inflation surge has reversed and while prices remain elevated, new price changes are muted. Unemployment has ticked up and may be in a danger zone that portends a recession but employment is still close to the best it’s been in a half century. Wages have been going up for seven or eight years, particularly among low earners.

While the labor market is not as strong as it was a year ago, jobs are still plentiful although not every opening fits a candidate. Housing is a problem for new buyers as prices remain high along with mortgages and house are difficult to afford for new buyers. Those who have owned houses, by contrast, are in good shape.

Why then so much fear and discontent? We have been going through massive changes for the last few decades and that scale of change is unsettling and scary. As our society turns inward, these fears could become self-fulfilling.

Despite these concerns, the U.S. stock market has been unusually strong for several years, showering riches on investors. This quiet bull market has been led by large, high profile technology stocks and has produced one of the best periods for wealth creation in history. These gains are not as widely distributed as some other sources of income, but through IRA retirement accounts and 401ks, stock market gains do reach many Americans.

In 2024, the U.S. stock market completed two years of back-to-back gains of more than 20 percent, one of only five such times in the last century and the first since the late 90s. In 2024 alone, the stock market reached 55 new highs and added $12 trillion to its total market capitalization, ending at $62 trillion.

It has been a highly unusual period because so much of that stock market value is held by a handful of stocks, mostly the high-profile technology stocks: Apple, Microsoft, Nvidia, Amazon, Google, Meta and Tesla. The top 10 stocks in the S&P 500 make up more than one-third of the value of the index, almost double the percentage of eight years ago.

This has resulted in these stocks being very highly valued and vulnerable to any short-term setbacks. In the last two weeks, the Nasdaq composite index, reflecting largely these stocks, has corrected by more than ten percent. At the same time, gauges of investor fear have surged and consumer sentiment has deteriorated. We have also witnessed a small rotation of stock market leadership to non-technology stocks.

We should not, however, rush to judgement that any of these trends will continue. Stock market and economic trends are only clear in retrospect because lots of little moves and false starts are common. For generations stock market analysts have tried to find predictable patterns to guide their investing and these efforts have generally failed. To deal with the huge amount of information humans see every day, people try to categorize and find patterns as much as possible even in the face of random data.

A good example of the difficulty of determining trends is that several years after a recession ends, a committee of the National Bureau of Economic Research, with many of the top economists in the country, looks at all the data and argues about when the recession began and ended.

Modern stock market analysts, armed with the fastest computers and artificial intelligence, constantly probe for profitable patterns. The rewards for finding clues to market movements are immense but success is so far beyond our most advanced capabilities.

So, sad as it is, the best course that practitioners and academic financial theorists have found is simply to ride out these market waves, accept the amount of risk appropriate for each investor and recognize that the future will unfold in new and exciting ways.

March 10, 2025