Bipolar disorder is a mental disorder that causes unusual shifts in mood, energy, and activity levels. These moods range from periods of extremely “up,” elated, irritable, or energized behavior (known as manic episodes) to very “down,” sad, indifferent, or hopelessness during the depression phase. – National Institute of Mental Health (NIH).
I’m not a mental health expert (my wife is), but doesn’t bipolar disorder sound eerily like what the stock market suffers from?
The stock market goes through wild swings of optimism and then can quickly shift to periods of severe depression, then back to optimism, with this cycle continually repeating.
Want just a few examples?
Extreme OptimismFrom 1996-1999. The stock market grew at more than 22% per year over this 4-year period, more than double its long-term average. These types of returns are unsustainable.  | Extreme PessimismFrom 2001-2002. The stock market lost over 31% from the beginning of 2001 to the end of 2002, reaching a low of almost 40%. Basically giving back some of the returns from the period 1996-1999. |
Going back a bit further we can see similar patterns throughout the stock markets history.
Extreme Optimism 1954 was a year of Mania, the stock market was up almost 44% in a single year! | Extreme OptimismThe mania came roaring back in 1958, the market was up almost 34%.  |
Extreme PessimismOf course, major lows are also part of the diagnosis. 1973-74 was one of those periods. | Extreme OptimismHere’s a more recent example of what I would call market mania (2017).  |
If we deem that the stock market suffers from bipolar disorder. What can we do about it?
Maybe we can learn from what the National Institute of Mental Health recommends for treating bipolar disorder in individuals.
First, we need to understand it’s a lifelong illness and usually requires lifelong treatment. However, the NIH says following a prescribed treatment plan can help people manage their symptoms and improve their quality of life.
Their (abbreviated) treatment plan includes a combination of:
- Medication and
- Psychotherapy, also called “talk therapy.”
Let’s use the NIH as a template for our suffering stock market and related investors.
First, we need to understand that the stock market suffers from this condition and it’s lifelong.
- Gather lots of data and information about the stock market and where we might be in the economic cycle, this could be considered the “Medication.”
- Talk with a financial professional about your unique situation, your goals, your risk tolerance, and how you should be invested knowing there will be both manic and depressive periods, this is the “talk therapy” part of the treatment.
As investors, we will be dealing with the stock market and its bipolar disorder for the foreseeable future. Since we as individuals can’t “fix” the disorder the stock market suffers from, we need to decide how we are going to interact with the market when it’s going through its various periods of hopelessness and manias.
-Paul R. Rossi, CFA