Bull Market Rhymes

While I employ a great many adages and quotes in my writings, my main go-to list consists of a relatively small number. One of my favorites is widely attributed to Mark Twain: “History doesn’t repeat itself, but it does rhyme.” It’s well documented that Twain used the first four words in 1874, but there’s no clear evidence that he ever said the rest. Many others have said something similar over the years, and in 1965 psychoanalyst Theodor Reik said essentially the same thing in an essay titled “The Unreachables.” It took him a few more words, but I think his formulation is the best:

There are recurring cycles, ups and downs, but the course of events is essentially the same, with small variations. It has been said that history repeats itself. This is perhaps not quite correct; it merely rhymes.

The events of investment history don’t repeat, but familiar themes do recur, especially behavioral themes. It’s these that I study.

In the last two years, we’ve seen dramatic examples of the ups and downs Reik wrote about. And I’ve been struck by the reappearance of some classic themes in investor behavior. They’ll be the topic of this memo.

I want to mention up front that this memo has nothing to do with assessing the markets’ likely direction from here. Bullish behavior came out of the pandemic-related bottom of March 2020; since then, significant problems have developed inside the economy (inflation) and outside (Ukraine); and there’s been a significant correction. No one, including me, knows what the sum of those things implies for the future.

I’m writing only to place recent events in the context of history and point out a few implied lessons. This is important, because we have to go back 22 years – to before the bursting of the tech-media-telecom bubble in 2000 – to see what I consider a real bull market and the ending of the resultant bear market, and I imagine many of my readers entered the investment world too late to have experienced that event. You may ask, “What about the market gains that preceded the Global Financial Crisis of 2008-09 and the pandemic-related collapse of 2020?” In my view, in both cases, the preceding appreciation was gradual, not parabolic; it wasn’t driven by overheated psychology; and it didn’t take stock prices to crazy heights. Moreover, high stock prices weren’t the cause of either crisis. The excesses in the former lay in the housing market and the creation of securities backed by sub-prime mortgages, and the latter collapse was a consequence of the arrival of Covid-19 and the government’s decision to shut down the economy to limit the spread of the disease.