how is the stock marketing different this time

5 Ways the Stock Market is Different This Time: What Could Possibly Go Wrong?

  • “It’s different this time” is usually not true. This time it is.
  • Will we get amplifying extremes or returns toward average?
  • A feasible scenario spells disaster.

The following observations are based on the Introduction to Baby Boomer Investing in the Perilous Decade of the 2020s. 

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It’s usually not true when someone says, “It’s different this time”, but it is true this time:

  1. Interest rates have never been lower
  2. The US government has never printed more money
  3. Stock prices have never been higher
  4. The wealth divide in the US has never been wider
  5. There have never been 78 million people simultaneously in the investment Risk Zone. Baby boomers are in the stage of their lives when their primary investment objective should be protecting their lifetime savings.

These are challenges that most people, especially baby boomers, are not prepared to deal with because most are not educated in finance and investing. Will Rogers said, “Everyone is stupid, but about different things.” 

What could possibly go wrong?


Low-Interest Rates

The government is implementing a Zero-Interest Rate Policy (ZIRP). Unlike retirees of the past, current retirees cannot earn a decent return on safe investments, so they’ve been forced into risky investments like stocks and riskier bonds. 

This manipulation is accomplished by Federal Reserve purchases of mass amounts of government bonds, financed with new money — money printing. 


Money Printing

The US government has spent $13 trillion and growing in new money. For perspective, this is more than our 13 largest wars combined. World War II cost $4.7 trillion in today’s dollars. 

The US government is poking the inflation bear, printing more and more until something breaks, and relying on Japan’s experience in even more money printing.

Inflation undermines the value of savings and in this case, it could pop the stock market bubble. See “What Could Possibly Happen?” below.


Stock Market Bubble

As market bubbles inflate, there is disagreement because bubbles are usually identified after they burst. This one is unique in its ability to persist in the throws of the COVID pandemic.

The average S&P annual return over the past 95 years is 10%. It has earned twice that return (19%) in the face of COVID, despite a 30% loss in the month ending March 23.

 Investor psychology (madness?) is the most likely explanation, including a belief in a rapid recovery even though experts forecast that COVID will impact the economy for the next decade. 

 Millennial investors have never experienced a market crash, but they are currently experiencing one of the consequences of money printing for quantitative easing, namely enriching the rich.


The Great Wealth Divide

Although the poor in this country are better off than many in other countries,  the gap between rich and poor is huge, as summarized in the following:

Consequently, there is social unrest around the country like Seattle, Portland, and Chicago.   The not-so-rich are demanding more, and the government is responding with more free stuff, leading us down the path to Socialism.


Baby Boomers in the Crosshairs

Baby boomers are the first generation to be responsible for the investment of their savings. In previous generations, we’re mostly covered by defined benefit pension plans where employers made all the investment decisions. Unfortunately, baby boomers are invested in 60/40 stocks/bonds on average. This is a mistake for most because baby boomers are in the “Risk Zone” spanning the 5-10 years before and after retirement during which investment losses can irreparably ruin the rest of their lives. 

Most importantly, baby boomers should not “stay the course” as they are frequently advised because most are on the wrong course and exposed to serious investment losses at this most critical time in their investment life.  There are no do-overs.      


What Could Possibly Go Wrong?

Danger does not always lead to disaster. The 5 reasons above for concern might somehow be resolved, but here is one realistic scenario. There are others.

Possible Scenario

  1. Massive money printing brings inflation. This is a controversial but feasible outcome. 
  2. Inflation forces interest rates to rise, eliminating ZIRP.
  3. Rising interest rates cause stock prices to fall because (1) forecasted earnings are discounted at a higher rate and (2) bonds become competitive with stocks again.
  4. Interest service on government debt increases, forcing reductions in other spending like Social Security and Medicare, and leading to a “Debt Spiral” of even more money printing.


Baby boomers should be protecting themselves now regardless of the current threats and this protection should include inflation. It’s possible that the next correction could last a long time, say a decade. Younger non-boomers are likely to come through the next correction, but it could take a long time.       

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