Happy Anniversary!

“Competing Narratives: The Market’s Balancing Act

For two years, markets have climbed, effortless and weightless, as if gravity had been repealed.  A thin-air rally, the kind that breeds overconfidence, the illusion of permanence.  But 2025 has yet to reveal its charm, and those who dismiss further gains as the prelude to an inevitable reckoning may find themselves out of step with history.  The question isn’t whether the market will break, but when, and whether, in the meantime, it might yet touch the heavens once more.

The closest parallel?  The late 1990s.  Not merely a bull market, but a financial hallucination, an amphetamine-fuelled delirium where stocks roared, reality blurred, and conviction became absolute.  The S&P 500 delivered five consecutive years of 20%+ gains, a fever dream of effortless wealth creation.  And not once did it suffer a single 20% price correction.  Insane, right?  Never been done before nor since.

But discontent, never forget, fuels audacity.  It was there then, and it is now.  The Fed, ever reactive, ever theatrical, cut policy rates despite an economy humming along, despite stocks pressing to all-time highs.  Who does that?  And the mega-cap stocks, once insatiable black holes, swallowing liquidity and displacing all else, now leaking energy at the edges.  A slow-motion shifting of power.  Death Stars dimming, capital spilling into smaller markets, a cosmic redistribution masked as a rally?

Markets do not collapse all at once.  They decay.  A slow, grinding erosion of momentum, an imperceptible leak that becomes a rupture.  This is the pattern.  It has always been the pattern.  We’ve seen it before, the great speculative migrations.  The Asian Tigers in the 1990s, the flight of capital from a stricken continent, the vacuum force of a dollar too strong, too dominant for its host economies.

Speculative capital does not vanish; it mutates.  Energy cannot be destroyed, only displaced.  The great speculative cycles do not disappear, they migrate.

Before a strong man can be defeated, he must first be bound.  Before a market collapses, it must first convince you that collapse is impossible.  The euphoria of one era funds the disillusionment of the next.  Before the fall, there is always one last rally.  Before the downfall, a final illusion of strength.  The cycle repeats.  Energy displaced but never lost.” (Author: Hugh Henry)

For some months now, I’ve been encouraging investors to consider the potential for a shift in “what’s working”.  The trend is your friend, until the trend changes.  The longer a trend prevails, the more participation it recruits.  The more imbalances build.  The more people believe the trend is permanent.  The inevitability of change is built into the trend itself.

Whilst a few down-days on the stock market doesn’t make a trend, it feels like we’re nearing some kind of tipping point.  The enthusiasm generated by Trump taking office has abated.  More people questioning whether his chaotic style might in fact instil less confidence amongst business owners rather than more.  More people questioning whether an AI-induced golden era of economic prosperity really does lie just around the corner.

The U.S. economy – already at stall-speed – has been showing increasing signs of weakness.  The closely-watched Atlanta Fed “GDP now” has just cracked:

It is a volatile indicator.  Is this reading an outlier soon to be reversed?  Or a sign of what’s yet to come? 

I’ve followed the career and cryptic ramblings of Hugh Hendry for close to two decades.  He made a name for himself during the Global Financial Crisis – guiding his hedge fund, Eclectica Asset Management, to several years of excellent returns whilst the rest of the financial world burned.  His investment philosophies are largely based around questioning the status quo – to challenge the prevailing narrative and to view markets through a lens of irony and paradox, with a strong nod to financial history.  Philosophies that resonate strongly with me.

He made the comment presented above in the later parts of-February.  Immensely insightful in his own trademark eclectic way…

As Hugh ponders, perhaps we need at least one more rally.  One more all-time high – convincing everyone that collapse is impossible. 

Or have we already witnessed the peak?  The key building blocks were in place – extreme valuations, excessive optimism, increased narrowing in “what’s working” that reflects what Hugh references as “erosion of momentum”.

March marks the 25th anniversary of the Dot com bubble peak.  Surely history can’t rhyme so near-perfectly can it?

Only time will tell. 

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