Never think that lack of variability is stability. Don’t confuse lack of volatility with stability, ever.”
— Nassim Nicholas Taleb, Ph.D., Professor, Options Trader, and Author of The Black Swan
Repeatedly Fooled By Randomness
If 1929 offers any lesson for 2025 investors, it’s that we will not see it coming, and we probably will not know it has
come until well after the fact. A forthcoming book by Andrew Ross Sorkin drives home an uncomfortable observation that investors are generally incapable of assessing risk, volatility, and market drivers in real time. Unlike most natural disasters, which have clear beginnings and endings, financial disasters can unfold over years. Some of the best days in equity market history have occurred on the heels of some of the worst days.
Contrary to popular belief, the stock market did not crash in 1929. The Dow Jones Industrial Average fell just 17% for
the year, mild compared to 1921’s 33% drop. Half that decline was recovered by April 1930. No major banks failed, no major corporations collapsed, and stockbrokers were not regularly hurling themselves out of windows. Ironically, the stock market was not even top of mind for most Americans; The New York Times ranked Richard Byrd’s flight to the South Pole as the most important news story of the year.
So why did 1929 go down in history as the year the stock market crashed? Because by 1932, bank failures cascaded, unemployment surged, and stocks fell 80% from their peak. History was simplified into sound bites, replacing
accuracy with memorability. Indeed, yes, 1929 was a bad year for the stock market, but the crash took 33 months
to complete (see Chart 1).
We’re now approximately 36 months into the current bull market. Unlike 1929’s investors, we have sophisticated
metrics that offer a glimpse into emerging trends. Consider, for example, valuation dispersion within the S&P 500:
the forward P/E spread between stocks in the 80th and 20th percentiles. We’re at roughly 16.8x as of August 31,
2025, a gap not seen since the dot-com era (see Chart 2).
Whereas in 1929, entire sectors diverged, with utilities generally trading at far higher multiples than railroads,
today’s dispersion is reflected within the S&P 500 itself. The median forward P/E of about 19.4x (August 31, 2025)
suggests a reasonably valued and stable market, but medians conceal more than they reveal when extremes
pull in opposite directions, as Taleb suggests.
Unlike investors who bought individual stocks 100 years ago, most investors now passively buy “the market” through index funds. That sounds like a prudent idea, but it means simultaneously owning companies priced for perfection and others priced for obsolescence. During the dot-com unwind, investors learned that averages provide cold comfort when dispersion collapses. The S&P 500 fell 49% from 2000 to 2002, but that average masked a more complex reality: technology shares fell roughly 80% while other sectors merely stagnated.
The index eventually recovered, but the divergent paths within it left very different outcomes for different investors.
When Averages Deceive
While historical records continue to be written and rewritten, some fundamental observations remain consistently
true. One is that extreme dispersion tends to converge at the worst possible moments. In calm markets, investors
find comfort in averages that are in-line with long-term trends. However, when markets face stress, expensive
stocks rarely drift gently toward fair value. Instead, valuation gaps close violently, usually from the top down.
Portfolio models built on normal distributions around that average discover, too late, that they were measuring the
mean altitude of mountains and valleys while flying straight toward a peak.
Even though we can observe this dispersion clearly, we remain poor at timing its resolution. The expensive stocks
might deserve their premiums, or they might not. The cheap stocks might be bargains, or they might be priced
correctly for a future we don’t yet see. We have more data than any generation of investors before us, but it hasn’t
made us any better at predicting when these extremes will matter.
Beyond valuation dispersion, other metrics flash yellow rather than red. The DXY U.S. Dollar Index has fallen
roughly 10% year-to-date through August 31, 2025 (see Chart 3), suggesting either the beginning of a multi-year
decline that could reshape global asset prices, or merely a correction in an ongoing trend. Historical dollar cycles
typically take five to seven years to complete, but as with dispersion, knowing the pattern doesn’t tell us where we
are within it.
The so-called “stock market crash of 1929” provides a good example of how financial reckonings unfold gradually, then suddenly. The investors who sold in October 1929 looked foolish when markets recovered in early 1930. Those who bought that recovery looked brilliant until 1932, making them both wrong. The market didn’t crash in a day or even a year. It unraveled thread by thread until the fabric gave way entirely.
Today’s extreme valuation dispersion, a weakening dollar, and an aging bull market might prove to be early warning
signs, or merely noise in a continuing expansion. Like those watching markets in 1929, we cannot know which interpretation is correct. Years from now, historians will likely compress whatever happens next into a simple
narrative, perhaps marking 2025 as a turning point invisible to us now, or dismissing it as just another year in
a longer trend.
Taleb reminds us not to mistake periods of relative calm for stability. The market of 2025 offers something potentially more dangerous: volatility hidden in plain sight, masked by averages and dispersion so wide they’ve ceased to provide meaningful guidance. We have all the data, all the metrics, all the sophistication that 1929’s investors lacked. What we still don’t have is any better ability to predict the future.
Every bull market carries warning signs that become obvious only in retrospect. Financial cycles repeat, corrections follow expansions, and investors will always struggle to see inflection points as they occur. Investing is risky, volatile, unpredictable, and somewhat random. Better to build a well-balanced portfolio to ride out the storm than to try to forecast the weather.
Chart 1 Source: commons.wikimedia.org, August 11, 2019
Chart 2 Source: am.jpmorgan.com, August 31, 2025
Chart 3 Source: am.jpmorgan.com, August 31, 2025
Disclosures
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for your clients. All performance referenced is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly. The S&P 500 is a capitalization-weighted index designed to measure the performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The MSCI All Country World Index (MSCI ACWI) is a free-float weighted equity index that includes both developed and emerging market countries. The MSCI AC World ex-U.S. Index captures large and mid cap representation across 22 developed markets and 26 emerging markets countries, excluding the United States. The MSCI Eurozone Index captures large and mid cap representation across 10 developed markets countries in the Eurozone. The MSCI Emerging Markets Index captures large and mid cap representation across 26 emerging markets countries. The MSCI China Index captures large and mid cap representation across China A-shares, H-shares, B-shares, Red chips, P chips and foreign listings. The U.S. Dollar Index (DXY) measures the value of the U.S. dollar relative to a basket of foreign currencies. Economic and market forecasts set forth may not develop as predicted. Investing in stock includes numerous specific risks, including potential loss of principal. Investing in foreign and emerging markets securities involves special additional risks, including currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. No strategy assures success or protects against a loss. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Diversification and asset allocation strategies do not guarantee profits or protection against loss. Investments in securities and other instruments involve risk and will not always be profitable. Loss of principal is possible. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.