Risk assets continue to climb, largely fueled by money printing and excess liquidity. When capital is cheap and plentiful, asset prices tend to rise often well beyond what fundamentals alone would justify. This kind of environment can persist longer than logic would suggest, which is precisely why bubbles are so convincing while they inflate.
Eventually, however, the cycle resets. When that reset arrives, history suggests it will not be gentle. Things do not usually “cool off”, they tend to come crashing down. Leverage unwinds, confidence evaporates and assets that once felt bulletproof suddenly look very fragile.
One important dynamic this time around is that many younger investors have never experienced a true market crash in their investing lifetime. For them, sharp sell-offs have often been followed quickly by policy support, stimulus, and rapid recoveries. Drawdowns were temporary inconveniences, not existential tests.
Real crashes do not feel that way when you are in them. Liquidity disappears, correlations go to one, and recovery takes far longer than expected. The psychological challenge is often greater than the financial one especially for those encountering it for the first time.
Meanwhile, the broader backdrop remains uncomfortable. Asset owners benefit as prices rise, while inflation steadily erodes purchasing power for everyone else. The wealth gap widens during the boom and becomes painfully obvious during the bust. There will be no such thing as a middle class in the next economic downturn.
For experienced investors, this is not a reason to panic but a reminder to stay prepared. Markets can be navigated profitably in both directions, during liquidity-fueled bull markets and during deep, uncomfortable bear markets, as we saw in 2000 and 2008. Sitting permanently in cash may feel safe but inflation ensures that standing still still means moving backward.
The party may continue, the music may get louder, and the dance floor may get more crowded. Just remember that when the lights come off, experience matters and not everyone will like what they see.