One of the hard parts of understanding market cycles is the fact that there are no counterfactuals.
You don’t get to test the real world in a Monte Carlo simulation with thousands of potential paths. There’s only one path and that’s what actually happens.
For example, my contention is that, as bad as things were during the pandemic, they could have been way worse as far as the economy goes. We had businesses shut down, people staying home for extended periods, remote work set up on the fly, and people losing their jobs effectively shutting down the economy for a month or so.
The fact that the economy snapped back so quickly is kind of amazing. Sure, we had high inflation but that outcome was much better than what some were predicting (which is something I wrote about in 2020). If you ran the pandemic simulation 100 times, things probably end up in a much worse place than they did maybe 90 times?
Maybe the government didn’t need to spend so much money. Maybe the Fed didn’t need to shoot their bazookas to keep the markets afloat. The problem with counterfactuals is that we’ll never know.
The reason most investors don’t dwell on counterfactuals is that the stuff that didn’t happen isn’t headline-worthy.
These aren’t headlines you’ll read in the financial media:
THERE WAS NO RECESSION YET AGAIN TODAY
THE STOCK MARKET DIDN’T CRASH…AGAIN
ANOTHER MONTH AND NO FINANCIAL CRISIS
However, it can be helpful to look back at some of the outcomes people were sure of at the time that never came to fruition.
During the Great Financial Crisis the Federal Reserve took drastic measures to shore up the financial system as it teetered on the edge of collapse.
They took interest rates to 0%. They implemented quantitative easing, which essentially involved buying assets from banks to shore up their balance sheets.
Many pundits, investors and economists were concerned these actions would lead to much higher inflation (some said hyperinflation), a crash in the dollar and a potential financial crisis down the road.
A lot of well-respected people even penned an open letter to Ben Bernanke laying out their concerns over the Fed’s actions.
The Fed kept interest rates on the floor for far longer than anyone could have imagined:
Short-term rates were anchored at 0% for much of the 2010s and a few years in the early-2020s as well. All in all, it was something like 8 or 9 years with 0% rates.
And yet…we didn’t have another financial crisis. Zero percent rates didn’t lead to another recession. The economy was slow and plodding but that’s what happens after a banking crisis.
As much as people talked about money printing in the 2010s, inflation remained subdued.
One of the main reasons for this is that the Fed wasn’t actually printing money and sending it to households. They were buying assets from the banks and holding those assets. The banks weren’t lending more money out to businesses and consumers so the asset swap simply shored up the banking system.
Inflation finally reared its ugly head in the 2020s because the goverment did send money to households and businesses. But that wasn’t the Fed.
Despite a lot of complaints over the years, the Fed’s actions didn’t lead to a financial crisis. Yes, there was an impact on the financial markets because interest rates can change people’s appetite for risk.
But there was no hyperinflation.
The dollar was stronger.
There was no financial crisis caused by monetary policy.
There were no recessions (outside of the brief pandemic-induced 2-month slowdown).
In fact, we just lived through the longest economic boom in history and one of the longest bull markets ever.
Interestingly enough, as I was drawing comparisons between the current bull market and the 1980s/1990s boom, I decided to look at the inflation that occurred in each period.
From 1982 to 1999, the cumulative change in CPI was roughly 79%. From 2009 to 2026, the consumer price index is up 56% in total. So even if you include the inflationary spike in 2022, prices have risen at a lower rate than they did in the 1980s and 1990s.
A lot of people assumed Fed policy would lead to an even greater crisis down the road.
Some would say they weren’t wrong just early.
Either way, it’s worth remembering that there are a lot of dire predictions in the financial pundit forecasting graveyard.
Most of the bad stuff people predict doesn’t come to pass.
Further Reading:
The Fed Matters Less Than You Think