When Everything Seems Good, Investors Should Still Prepare for Market Dips

The bull market and upbeat economic landscape doesn’t tell us much about the future, says a Wall Street Journal article from earlier this month, “and the rise in stocks makes it less likely the general awesomeness will continue.”

According to the article, worry has “all but disappeared this year,” but this creates a situation where investors are less prepared for bad news. However, the article argues, there are “few signs of irrational exuberance” to make investors wary. And since investors tend to believe that bear markets only come with recessions—and there don’t seem to be any indicators that one is imminent—they subscribe to the notion that economic cycles “don’t die of old age” but the article says, “Unfortunately, this is both wrong and useless.”

It argues that market drops as high as 20% can happen in the absence of a recession, citing 1966 and 1987 as examples. Further, economic cycles can be “killed by a financial crash,” it says, referencing an argument made by the late economist Hyman Minsky that “the longer a financial cycle goes on, the more likely it is to turn to excess and end badly.” Even though there’s no way to know when the next correction will occur, the article concludes that “when everything is awesome it’s best to prepare for things to be a little less awesome in the future, even at the cost of missing out on some of the gains if investors get still more complacent from here.”