Economic Mystery Hour: How Low Will Stocks Go? Is a Recession Inevitable?

Morgan Housel, author of The Psychology of Money and a partner at Collaborative Fund, joins the show to play stock doctor and diagnose what’s killing tech stocks. Then we debate the odds of an imminent recession and talk about how China’s bizarre year could weigh on U.S. growth. Finally, we go through all the good reasons and the not-so-good reasons for cancelling student debt. Part of their conversation is excerpted below.

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Derek Thompson: I want to start with stocks. The S&P 500 is down 14 percent this year. The Nasdaq is down 22 percent, and I wanted to bring you on to be the show’s stock doctor—diagnose what exactly is happening here—but also as our stock psychologist. How should we think about what’s happening in the markets today? So first, let’s have you play stock doctor: What do you think is happening in the markets in 2022?

Morgan Housel: I think stock doctor and stock practitioner is almost the same thing right here, because you mentioned earlier the S&P 500 is down 14 percent year-to-date, which is a really actually important number, because if you look at the last 100 years in stock market history—the average year, not the average bad year, just the average of all years—the peak to trough in any of those individual years on average is 13.5 percent. So literally what we’ve experienced so far this year that feels so bad and feels like it’s the end of the world is literally the average year over the last hundred years. And so in many ways, what we’re dealing with is completely normal, completely expected, completely inevitable. I think it feels worse for two reasons. One is that we’ve just had a two-year period when the markets effectively just went straight up.

And not only that, but you had literally tens of millions of investors who were participating in the stock market for the first time. Robinhood, the trading app that is primarily geared toward young investors, in March of 2020, when the pandemic began, they had 7 million customers, 7 million accounts; by the end of last year, they had 24 million accounts. So you have literally tens of millions of investors who are investing for the first time, and all they’ve known is not only a market that goes up, but a market in which it is normal to double your money every six months, which a lot of them in meme stocks were, and that’s their baseline for normal. So now that you experience a 14 percent decline, even if historically it is so benign and expected for that cohort of investors, it’s like the end of the world.

The other point here is that most of those investors were in high-growth tech stocks and those stocks are not down 14 percent. A lot of ‘em are down 80 percent, 70 percent. ARK, the ETF mutual fund that gained so much prominence, was kind of like the face of the bull market. It’s down 70 percent from its high. One point that I’d make here is that there’s this theory that I like. It’s not analytical, this is very just rule of thumb, but how fast a stock goes up, that’s the half life for how much it can go down. So if you are investing in stocks that can double in one year or did double in one year, you should expect that they could also lose half their value in one year as well, which is exactly what has happened.

DT: You said two things that I definitely want to talk about, the second being that tech stocks are down a lot. And I think a lot of investors have come to expect that a lot of these tech stocks do not apply to the rules of gravity. Like the FANG stocks, the software giants, they just go up and this year has falsified that thesis. But I’m really glad that you mentioned the fact that just doing the quick numbers here, 15 to 20 million retail investors came online in 2020 and 2021. And all they know is a stock market that since March 2020 has gone up and up and up and up in kind of an exponential-style curve. I remember seeing a viral TikTok with this TikTok investor influencer who said, “Here’s how I make $15,000 a month. Ready? Here we go. When a stock is going up, I buy it. And when a stock is going down, I sell it. That’s it, that’s how I’m going to make $600,000 this year.” And it was like, “Oh, you sweet summer child.” Like, yes, that is a sensational strategy for this moment. But oh my God, when the stock market does what it will inevitably do and starts to come down, that strategy will not work at all.

MH: What’s crazy about that, too, is two things: (a) he was not being sarcastic, he was being totally serious when he said that; but (b) that strategy worked really well for like two years. So as easy as it is to poke fun at that. … I don’t necessarily blame literally 20 million new investors for thinking that’s how it works. And it just makes this new bath of reality that we’re in right now feel that much worse than it would be. Whereas if you are kind of a student of stock market history, you will understand what’s going on right now is completely benign.

This excerpt has been lightly edited for clarity.

Host: Derek Thompson
Guest: Morgan Housel
Producer: Devon Manze

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