- The US bull market is days away from its 10th anniversary, but a growing generation of investors and traders have never known a bear market or a major economic downturn.
- Experts are worried this means big mistakes or missed signals are likely when the either the bull market or economic expansion eventually ends.
- Two veteran economists say the unusual qualities of the last decade — like long-lasting growth, very low interest rates, and accommodative central banks — have left millennial traders unprepared for different conditions.
As the stock market celebrates an epic anniversary, experts are worrying that investors aren’t ready for what comes next.
The current bull market turns 10 years old on March 9, and the economy is in its longest expansion in generations. Yet while both are indisputably positive, their longevity also means a growing generation of Wall Street employees have never experienced a bear market or a recession.
And that could become a very big problem in the unfortunate event a meltdown in either area occurs — even if it’s not for a while.
“It very likely is going to heighten odds of some sort of a panic,” David Rosenberg, the chief economist and strategist for Gluskin Sheff and Associates, told Business Insider by phone.
Rosenberg is renowned on Wall Street for predicting the housing bubble and the Great Recession that it caused. He’s long been concerned about how inexperienced investors will handle a downturn.
The S&P 500 has soared more than 300% in the last decade as economy gradually rallied following the Great Recession. The Federal Reserve lowered interest rates to an unprecedented degree in an at temp to soothe investors, stepping in to help the market and the economy in ways it didn’t in the past.
Since everyone learns from experience, people who have joined the financial industry or started investing in the last decade might not know how unusual those circumstances were. Longtime economists have two basic concerns: (1) that younger Wall Street pros will fail to recognize when conditions change, and (2) that they won’t know what to do when it happens.
“You need to know economic history,” Dr. Lacy Hunt of Hoisington Investment Management — an award-winning economist, author, and 50-year Wall Street veteran — told Business Insider. “US economic history, world economic history. You need to understand that economics is a science.”
Rosenberg, 58, contrasts the millions of people who have taken jobs in finance in the past decade with his own career. He says he started a job at the Bank of Nova Scotia on Black Monday, October 19, 1987. The Dow Jones industrial average plunged almost 23% that day, its worst-ever decline.
In the turmoil that followed Black Monday, Rosenberg says he learned how the market behaves in different types of recessions and how to evaluate numerous threats to stocks and the economy. He’s not sure younger traders and managers are getting that kind of experience.
“They’ve only lived through half a cycle over a decade, and you can’t help but build up a certain level of hubris,” he said.
Hunt, 76, says the dominant trading styles of trading and analysis today could also turn into a problem because it’s encouraging investors to focus on single economic indicators instead of the bigger picture.
“They’re going with momentum,” he said. “The algorithmic trading enhances all that, too. You get swept up in that mindset.”
That’s also one of Rosenberg’s top concerns: traders have been practicing the same strategy for so long that they won’t know when it’s going to stop working — something that could compound their losses. For context, buying the dip is a strategy that involves scooping up discounted shares after a sell-off.
“The big risk is that they will stay at the party far too late, to the detriment of their client base,” Rosenberg said.
Further, Hunt cautions investors that, in the long term, economies move in predictable cycles while short term events can be more random. That means they can actually have better knowledge of the long term than the immediate future. If they don’t know that, he says, they may not understand that the end of this cycle is inevitable.
“The key is the strategic view and knowing how the world works,” he said. “It’s the strategic view that pays.”
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