After the tax cuts were enacted in December, I remember thinking that we were about to see some big moves in the stock market. Over the past few days I have been thinking more about that. These thoughts were prompted by a post by qazulight in response to a post by me where I was comparing the current time in the stock market to 1997. qazulight wrote:
I tend to think we are in the early 1980, and the market can rise for another 15 years.
What happened in 1981 was the first of the 2 Reagan tax cuts. Is there is a link between those taxes cuts to the great bull market that lasted until the internet bubble burst in 2000? That was essentially an 18 year run. Was it the tax cuts in 1981 and 1986 that helped fuel that period where investors could make incredible returns in the market? Or was it technology accelerating that led to such a strong market? Or was it the combination of many factors? I don’t know, but one thing is clear: that period offered investors opportunities to amass vast amounts of wealth. Are we at a time now where we will have a similar opportunity? Saul often talks about the wall of worry, and he is right that we have had a wall of worry for the past 9 years; there was fear of the double dip recession, the Greek financial issues, the debt ceiling, the Chinese stock market causing contagion, Brexit. There was always a reason why the market was about to crash. Some people said that since a crash occurred in 2000 and 2008, there must now be one in 2016; every 8 years there is a crash. People look for patterns. Am I also looking for a pattern when I compare 1997 to today or compare 1981 to today? Or is there really a link to massive tax cuts and a subsequent multiyear stock market rally? I don’t quite know the answer. But here are some things that I think I know:
There are so many people that fear another crash. I hear it all the time when I talk with people about investing. I think that people have been conditioned to expect another crash because deep down they have been negatively and financially affected by 2000 and 2008. This may have and perhaps continues to contribute to keeping a lid on a melt up. I think this is the cause of the wall of worry that Saul talks about.
We have not yet seen the type of euphoria that was in place in the late 1990s. This was when everyone talked about the stock market and everyone was giving out stock tips. We are nowhere near that, but I think a time like that will return. I think that can happen when the conditioning in #1 above fades. Will it fade? If so what would cause it to fade? Maybe first more of the money needs to be controlled by people who were too young to remember the pain of 2000 and 2008. If that’s the case then it could be a while before euphoria returns. Or perhaps a could of years of spectacular returns might lead people to “forget” 2000 and 2008. If this is the precursor then we can look to 2017 and 2018; will great returns of these 2 years lead people to take on more risk and prompt people who have been scared for 8 years to pile back into stocks? If that is the case then maybe we could see euphoria return in 2019. I don’t know the answer but I have a feeling that maybe it’s coming sooner rather than later.
We are at an interesting time. Technology is accelerating and many people don’t realize it. One can read about how Ray Kurzweil views the world: technology accelerating appears to be a linear phenomenon for those who are experiencing it but it is actually exponential. I think we are approaching the hockey stick in technology acceleration. When we reach that hockey stick inflection point, it will be fast. How close are we to that now? I think quite close. What will it mean for the stocks and for economic wealth creation? How deflationary will it be?
I think about the loose monetary policy following the financial crisis of 2008. I think about what would have happened if there was no QE. If we had practically zero inflation following QE then what would have happened to inflation if there had been no QE. I think the answer is obvious: we would have had deflation in the absence of QE. Was the necessity of QE a necessity because of the financial crisis or was the financial crisis a coincidence that masked the need for QE due to the deflationary effects of technology acceleration? If the later is true then the future path of inflation and interest rate increases by central banks may be much shallower than expected.
Now I think about all of the above in the context of my portfolio. I feel so fortunate that I found Saul when I did. Saul has truly changed my life because he and this board have taught me to be a better investor and to be in a position to take advantage of the ideas in #1-4 above assuming that this future comes to pass. I have learned skills here that I did not have 4 years ago. I have jettisoned bad ways of thinking and acting (when I push the buy or sell button or when I don’t trade when I should) when it comes to making investment decisions. I know that I can still improve and learn more. But I really do feel that I now have learned how to survive financially by just using my brain to analyze companies and markets and making investment decisions that will lead to positive returns that can beat the markets by a wide margin over time. It has been a 4 year journey on this board: at the beginning of that journey I believed that making a living as an investor was possible. After 4 years of learning and watching Saul, I have experienced that belief as truth. If you are new to this board, keep reading and keep listening to Saul. Read the Saul’s Knowledgebase a few more times. Saul is truly a special investor and person. Thanks Saul!