On October 17, 1929, renowned economist Irving Fisher declared, “Stock prices have reached what looks like a permanently high plateau.” He confidently asserted that a significant decline was unlikely, claiming he expected the stock market to surge even higher in the coming months. This assertion came at a precarious moment, as the DOW stood at 341.86, down from a peak of 381.17.
Just days after Fisher’s prediction, the stock market plunged sharply, and his reputation took a considerable hit. By October 23, 1929, after a 20% decline in stocks, Fisher proclaimed that the business landscape was “fundamentally sound.” If you’re curious, you can find an early video of Fisher’s ill-fated statement here. Despite his unwavering optimism, he was tragically mistaken.
In reality, neither the market nor the economy was stable. Fisher’s anticipated rise did not materialize; instead, the DOW plummeted over 89%, with stocks not regaining their pre-crash standing for another quarter of a century. The Fates—Clotho, Lachesis, and Atropos—surely chuckled at Fisher’s hubris. Stock market prices are inherently volatile. Did Fisher realize he was tempting fate with his “permanently high plateau” proclamation?
The Bears Are All Gone
As Hunter S. Thompson once noted, “Myths and legends die hard in America.” Although he may not have been referring to the stock market, his words resonate with the widely held yet misguided belief that the stock market is designed to enrich the average investor.
This belief persists, even when ample evidence suggests otherwise. An impartial observation reveals the truth: the stock market primarily operates to separate individuals from their money, rather than to make them wealthy.
“Everyone believes the U.S. stock market has reached a permanently high plateau,” stated Michael Sincere, a Long-Term Trader, just last week. “Everyone, that is, except for the bears.”
According to last week’s Investors Intelligence survey, bear market sentiment is at its lowest point since 1987, sitting at just 13.3%. Short-sellers have largely vanished, and the VIX (a measure of market volatility) has dropped to historic lows of around 12, reflecting a sense of complacency among investors.
“In simple terms, almost no one anticipates a downturn in this market.”
Holding the Permanently High Plateau
Walter Lippmann once observed, “Where all think alike, no one thinks very much.” Given the prevailing low levels of bearish sentiment and the historic lows of the VIX, one can easily conclude that critical thinking is in short supply.
Nevertheless, the bullish trend continues unabated. The current bull market strides confidently forward, akin to Napoleon’s army during its ill-fated campaign to Moscow in 1812. Just like Napoleon’s Grande Armée, today’s investors may be blinded by a false sense of invincibility.
Such arrogance often leads to catastrophic outcomes. During that campaign, approximately 432,000 French soldiers initially set out for Moscow, but only about 10,000—one in forty—made it back home. This serves as a cautionary tale: nothing fails like success.
The belief in a permanently high plateau for stock prices is just as unfounded today as it was a century ago. A triggering event will eventually prompt even the staunchest optimists to reevaluate, leading to a frantic rush for the exits.
Yesterday, despite an initial dip of about 10 points, the S&P 500 managed to maintain stability, closing up by 1.76 points. The notion of a permanently high plateau continues to endure, at least for now.
Sincerely,
MN Gordon
for Economic Prism
Return from Holding the Permanently High Plateau to Economic Prism
