The punditry world is usually split into two groups: optimists and pessimists. "Are you bullish or bearish?" People want a binary answer.
There's not enough attention paid to a third group: Optimists who regularly expect terrible things to occur. It seems counterintuitive, but if you look at history, it's by far the most rational stance.
The S&P 500 rose 1,100-fold over the last 70 years, including dividends. But look what happened during that period:
May 1946 to May 1947. Stocks decline 28.4%. A surge of soldiers return from World War II, and factories across America return to normal operations after years of building war supplies. This disrupts the economy as the entire world figures out what to do next. Real GDP declines 13% as wartime spending tapers off. A general fear that the economy will fall back into the Great Depression worries economists and investors.
- June 1948 to June 1949. Stocks decline 20.6%. A world still trying to figure out what a post-war economy looks like causes a second U.S. recession with more demobilization. Inflation surges as the economy adjusts. The Korean conflict heats up.
- June 1950 to July 1950. Stocks fall 14%. North Korean troops attack points along South Korean border. The U.N Security Council calls the invasion "a breach of peace." U.S. involvement in the Korean War begins.
- July 1957 to October 1957. Stocks fall 20.7%. There's the Suez Canal crisis and Soviet launch of Sputnik, plus the U.S. slips into recession.
- January 1962 to June 1962. Stocks fall 26.4%. Stocks plunge after a decade of solid economic growth and market boom, the first "bubble" environment since 1929. In a classic 1962 interview, Warren Buffett says, "For some time, stocks have been rising at rather rapid rates, but corporate earnings have not been rising, dividends have not been increasing, and it's not to be unexpected that a correction of some of those factors on the upside might occur on the downside."
- February 1966 to October 1966. Stocks fall 22.2%. The Vietnam War and Great Society social programs push government spending up 45% in five years. Inflation gathers steam. The Federal Reserve responds by tightening interest rates. No recession occurred.
- November 1968 to May 1970. Stocks fall 36.1%. Inflation really starts to pick up, hitting 6.2% in 1969 up from an average of 1.6% over the previous eight years. Vietnam War escalates. Interest rates surge; 10-year Treasury rates rise from 4.7% to nearly 8%.
- April 1973 to October 1974. Stocks fall 48%. Inflation breaks double-digits for the first time in three decades. There's the start of a deep recession; unemployment hits 9%.
- September 1976 to March 1978. Stocks fall 19.4%. The economy stagnates as high inflation meets dismal earnings growth. Adjusted for inflation, corporate profits haven't grown for eight years.
- February 1980 to March 1980. Stocks fall 17.1%. Interest rates approach 20%, the highest in modern history. The economy grinds to a halt; unemployment tops 10%. There's the Iran hostage crisis.
- November 1980 to August 1982. Stocks fall 27.1%. Inflation has risen 42% in the previous three years. Consumer confidence plunges, unemployment surges, and we see the largest budget deficits since World War II. Corporate profits are 25% below where they were a decade prior.
- August 1987 to December 1987. Stocks fall 33.5%. The crash of 87 pushes stocks down 23% in one day. No notable news that day; historians still argue about the cause. A likely contributor was a growing fad of "portfolio insurance" that automatically sold stocks on declines, causing selling to beget more selling -- the precursor to the fragility of a technology-driven marketplace.
- July 1990 to October 1990. Stocks fall 19.9%. The Gulf War causes an oil price spike. Short recession. The unemployment rate jumps to 7.8%.
- July 1998 to August 1998. Stocks fall 19.3%. Russia defaults on its debt, emerging market currencies collapse, and the world's largest hedge fund goes bankrupt, nearly taking Wall Street banks down with it. Strangely, this occurs during a period most people remember as one of the most prosperous periods to invest in history.
- March 2000 to October 2002. Stocks fall 49.1%. The dot-com bubble bursts, and 9/11 sends the world economy into recession.
- November 2002 to March 2003. Stocks fall 14.7%. The U.S. economy puts itself back together after its first recession in a decade. The military preps for the Iraq war. Oil prices spike.
- October 2007 to March 2009. Stocks fall 56.8%. The global housing bubble bursts, sending the world's largest banks to the brink of collapse. The worst financial crisis since the Great Depression.
- April 2010 to July 2010. Stocks fall 16%. Europe hits a debt crisis while the U.S. economy weakens. Double-dip recession fears.
- April 2011 to October 2011. Stocks fall 19.4%. The U.S. government experiences a debt ceiling showdown, U.S. credit is downgraded, oil prices surge.
- June 2015 to August 2015. Stocks fall 11.9%. China's economy grinds to a halt; the Fed prepares to raise interest rates.