A year ago a recovery in sales of consumer discretionary items like appliances and autos would have seemed inconceivable. Floyd Norris at his blog notes how the “new normal” was supposed to preclude this type of result. He attributes this largely to an overreaction to the credit crisis. Norris writes:
What is going on? Don’t investors realize that appliance sales must remain depressed until housing recovers, and that housing cannot recover until employment does, and that we are in for a prolonged period of high unemployment? Don’t they know that the “new normal” means subpar growth for many years to come?
Daniel Gross at Newsweek attracted a considerable amount of (negative) attention a couple of weeks ago for a unabashedly positive account of the American economy. Negative attention because it went against the grain of current thinking that the US economy was in a permanent state of disrepair.
The response of many in the financial markets has been one of incredulity. Howard Lindzon has called this bull market the “inconceivable rally” because so many people doubted it along the way. Maybe what has followed is an “inconceivable recovery”?
It seems that just as we all got comfortable with the “new normal” something different came along: an economic recovery. The length and breadth of the recovery remain in doubt, but it is here. It always seems to work out that way. Just we become convinced that a certain trend has emerged (and we adjust to it), it changes.
Carl Richards at the Bucks Blog notes how we set our expectations and why this often leads to disappointment:
Expectations are very tricky because they’re almost always wrong. But our expectations drive our behavior anyway. Our view of the future is the fundamental basis for how we act today. Since our expectations about the future are regularly based on our recent experience, we act as if the next week, month and year will be just like the last one.
What can we do in response? Richards notes that to combat this bias we need to lengthen our time horizons and look to history as a guide. While we may have thought that this crisis/panic was something altogether unique. History tells us it looks somewhat familiar. Investors who recognized this were able to take advantage of what turned out to be a fantastic buying opportunity.
So does a new, new normal mean happy times are here again? Not necessarily. Investors should still be on guard for the potential downsides. The economy could still turn tail and go back into some sort of debt-fueled dark age. However the past year is a stark lesson in how we set expectations and how generating some perspective can help investors combat our short-sighted tendencies.
Update: See this post from Financial Armageddon with a contrary view.