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Not So Different

Jonathan Clements

THE ECONOMY IS recovering and the stock market has recovered. The pandemic isn’t over, but it seems we’re past the worst, at least in the U.S. Feeling better? Take a deep breath, take a step back—and think about the past two decades.

Since early 2000, we’ve had three major stock market declines, or roughly one every decade:

  • In 2000-02, the S&P 500 tumbled 49%, excluding dividends. The first leg down was triggered by the bursting of the dot-com bubble. The second leg down was driven by the Sept. 11 terrorist attacks and the 3,000 who died that day. The result wasn’t just a brief hit to the economy and U.S. military action in both Afghanistan and Iraq, but also a profound blow to the national psyche. Remember folks buying gas masks, stockpiling food and worrying about anthrax-laced letters? It was a phrase heard over and over: “The world will never be the same again.”
  • The S&P 500’s 57% decline in 2007-09 was all about the economy, starting with the real estate market but eventually sending shock waves throughout the business world, toppling major Wall Street firms along the way. Everyday Americans may not have been fearful for their lives, as they were in 2001 and the years that immediately followed, but there was widespread fear that we would see a meltdown of the entire financial system.
  • The S&P 500’s 34% drop in early 2020 was, of course, all about COVID-19 and the resulting shutdown of the global economy. Many lost their lives, while those who lived saw their daily routine upended. Few of us had ever experienced anything like it.

Why do I recount this disturbing history? Each time, experts and everyday investors cried, “It’s different this time.” Yes, each of these three crises were indeed different. If they had been carbon copies of earlier market panics, investors would have spotted the similarities and responded far more calmly.

“History doesn’t repeat, but it rhymes,” or so goes the saying, which—it seems—wasn’t said by Mark Twain. When the stock market next plunges, it won’t be the same as 2000-02, or 2007-09, or early 2020. But it’ll have similarities: the panicked investors, the widespread fear that the decline will only get worse, the declarations that this market crash is somehow different from all earlier market crashes, and that stocks won’t recover any time soon. Which, needless to say, is about the time when stocks do indeed defy the naysayers and head higher.

To survive a stock market crash, you don’t need a brilliant investment mind. Instead, all that’s required are tenacity, an awareness of market history and enough cash to cover upcoming expenses, so you aren’t forced to sell stocks at the worst possible time.

As I’ve mentioned before, the stock market represents an asymmetrical bet. If all goes well, stocks will fare just fine over the long run. What if economic apocalypse finally arrives? It won’t matter what investments you own. If the globe is reduced to an economic wasteland, nobody’s going to swap their canned goods for your gold bullion, and they certainly won’t barter food for your cryptocurrency or nonfungible tokens.

But I also believe there’s scant chance we’ll ever see that sort of worldwide economic meltdown. Think about the remarkable response to the pandemic—how rapidly governments responded, how quickly businesses adapted, how fast we developed vaccines. This astonishing ability to change and innovate, with an eye to making sure tomorrow is better than today, is what keeps the economy growing—and it’s why we shouldn’t assume the next crisis will be anything more than a painful, but relatively brief, moment in time.

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.

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