1998 Redux: Why We’re Entering the Start of a Lost Decade

Markets have spent the past few months showing some indecision.

After hitting new highs just over 7,600 in May, the stock market had a small pullback, then a bounce higher, slightly off all-time highs.

For now, the dominant themes from the past few months remain in place. There’s a mania over AI stocks, which saw massive year-over-year earnings growth.

Plus, after 38 reports that a peace deal was about to be struck between the U.S. and Iran, President Donald Trump flew to Versailles in late June to sign the paperwork for the deal. Yet somehow, now in July, we still don’t have a deal, and Trump has declared the ceasefire over.

Meanwhile, traffic in the Strait of Hormuz remains down by over 90% from pre-war levels, even as oil prices have slid back to pre-war levels in the $70s, and as America has drained its strategic petroleum reserves to levels last seen in 1983.

Amid that backdrop, the stock market is going gangbusters. That’s typically not how markets move into the summer months, especially in midterm election years.

Over at The Grey Swan Trader, I often include this chart in our weekly livestream:

Markets tend to see worse performance in midterm years, with the market moving higher just before the election.

We can see that the market trends to rally throughout the year, but sags a bit in the summer months, before ending the year strong.

That summer sag is more pronounced in midterm years, with markets catching up as the midterm elections near.

But this year’s market action feels more like 1998.

That was a year after Alan Greenspan’s “irrational exuberance” speech, which was the first warning of how much tech stocks were driving markets higher.

The late 1990s saw back-to-back years of double-digit returns (sound familiar?). But within those years, there were some sharp pullbacks along the way. Instead of tariff tantrums and war with Iran, we had the collapse of hedge fund LTCM and the Asian crisis.

Yet in both 1998 and 2026, the tech drumbeat marches on.

However, some cracks are forming. The AI story continues to gobble up capital faster than earnings can grow. Companies are in a race against time, not to mention each other, in the AI race. And now the market structure is turning against investors.

For instance, part of the market’s big returns over the past 10 years has been thanks to surging buybacks from Big Tech companies. Now, that’s flowing in reverse.

Alphabet (GOOGL), for instance, announced in June that it would raise $80 billion in capital by selling shares, marking the largest secondary offering in history. It’s also a move that undoes years of share buybacks:

Remember, share buybacks reward existing shareholders. They shrink the pie, effectively giving you a larger slice. Now, you’re getting a smaller pie, with the hope that the AI flavoring will more than make up for it.

You may not have noticed this move yet, but the market sure has. The “Magnificent Seven” stocks, dubbed “hyperscalers” in the AI era, are now underperforming as chip stocks have taken off and other sectors have more than held their own this year.

IPO Mania Ahead

In the meantime, capital markets now have a lot more to absorb than secondary offerings.

SpaceX (SPCX) held its initial public offering in June, already the first company to be valued at over $1 trillion before it even went public.

That’s a function of the size of the company and how much money is sloshing around in the financial system. Hedge funds and venture capital firms have had access to SpaceX for years, well ahead of its IPO.

For instance, Peter Thiel’s Founders Fund invested about $600 million over nearly two decades, building about a 3% stake in SpaceX. At the IPO price, that position is worth over $50 billion.

That’s a great return if you can get it. The problem? Retail investors aren’t going to get a return anywhere near that from SpaceX, at least not anytime soon.

Plus, despite shares rising in the first few days of trading, more stock is on the way. Only 5% of SpaceX’s total amount of shares (which Wall Street calls “float”) were available at the IPO. Another 20% comes available on August 11. That’s a lot more volume for the market to absorb.

Remember, IPOs are a kabuki dance on Wall Street. As long as the share price can trade higher in the first few sessions, it’s considered a success. But look at how big-name IPOs have fared:

Most IPOs drop below their initial price within their first 12 months of trading, and on average decline by over 50%.

On average, an IPO will see a 55% decline at some point within its first year of trading. That may not mean a 50% drawdown from the IPO price.

For those who like SpaceX, you may get the best returns by waiting until shares have a hefty drawdown rather than buying today. Chances are, we may see that in the next few months.

SpaceX is the big IPO, but OpenAI, valued at nearly $1 trillion, is also planning to go public soon. As is AI giant Anthropic. That’s a lot of capital for the market to absorb, and a good reason to expect the market to pause for a bit after its big run higher this year.

On a longer timeframe, the launch of big IPOs feels like institutional investors ringing the cash register. Some of that may be well-deserved profit-taking after holding for years, and, yes, in some cases decades.

The Case for a Lost Decade

If we apply the 1998 analogy to markets right now, it could also be a sign that we’re nearing or have already entered a lost-decade period for stocks.

Lost decades for the market are nothing new. If anything, they used to be far more common when fewer Americans participated in the stock market, and there was less monetary and fiscal support for the financial system:

Lost decades for the stock market are nothing new, but history suggests we may be overdue for one.

But we’re now at a higher risk of one occurring. Each of the last three lost decades was followed by a 15-20-year period of prosperity. And since the end of the last lost decade, we’re at year 17.

Here’s what each of the last three looked like:

1929 to 1954: The Great Crash and Its Long Shadow

By the late 1920s, the United States was gripped by a fever of optimism that seemed entirely justified…

The post-World War I industrial boom had transformed the economy, with mass production, electrification, and the rise of consumer credit lifting living standards substantially.

The stock market reflected this confidence — and then went into overconfidence. As one popular tune of the time went, “Happy days are here again.”

Easy margin lending allowed ordinary Americans to buy stocks with as little as 10% down, pouring speculative capital into an already surging market.

Radio, automobiles and steel were the tech darlings of the age. The Dow Jones Industrial Average rose nearly 500% during the 1920s, and many believed a “new era” of permanent prosperity had arrived.

The reckoning came swiftly.

The crash of October 1929 wiped out billions in paper wealth, but it was only the beginning.

The deeper catastrophe was the banking system’s collapse: more than 9,000 banks failed between 1930 and 1933, destroying savings and strangling credit.

The Smoot-Hawley Tariff sparked retaliatory trade wars, crushing exports. Unemployment hit 25%.

Government attempts to stabilize the economy, from mining engineer Herbert Hoover’s first attempts to FDR’s expansive New Deal, couldn’t fully reignite private investment, which was haunted by deflation and uncertainty.

Unsurprisingly, a second severe recession hit in 1937.

World War II redirected the economy toward war production rather than the consumer economy. Japan could have struck Pearl Harbor, and Germany could bomb London, but neither had the capacity to destroy America’s Arsenal of Democracy, centered around Detroit.

The end of the war finally led to a resurgence in confident consumer spending. Yet, despite the post-war boom in consumerism, the stock market did not reclaim its 1929 peak in nominal terms until 1954. Forget a “lost decade;” that’s a genuine lost quarter-century for stock investors.

1968 to 1982: Stagflation and the Death of the Nifty Fifty

By the late 1960s, investors had piled into a group of blue-chip growth stocks — IBM, Xerox, Avon, Polaroid — dubbed the “Nifty Fifty.”

Ignoring the 25-year sideways period in the market from 1929 to 1954, investors in the 1960s were willing to pay price-to-earnings ratios of 50, 60 or even 90 times earnings on the conviction that these companies would grow forever.

Confidence was so high that valuation almost seemed irrelevant. The question among analysts wasn’t whether to buy or not, but how much of each growth stock to buy.

What followed was a brutal decade-long grind, caused by a series of shocks.

The abandonment of the Bretton Woods gold standard in 1971 unmoored the dollar, and the 1973 OPEC oil embargo sent energy prices skyrocketing.

The resulting stagflation, simultaneous high inflation and economic stagnation, was something economists had insisted was theoretically impossible.

The Federal Reserve, reluctant to crush growth, allowed inflation to fester through the 1970s.

Stock prices collapsed as earnings were eaten by inflation and interest rates soared. The Nifty Fifty darlings fell 70% to 90% from their peaks. The Dow spent most of the 1970s oscillating between 600 and 1,000.

Only Paul Volcker’s brutal monetary tightening after 1979, which pushed the prime rate above 20%, finally broke inflation’s back — setting the stage for the 1980s bull market.

Given the inflation of the 1970s, the stock market’s nominal return was nearly as bad as the market crash from 1929 to 1932.

1997 to 2009: The Double Bust

By the mid-1990s, the internet was rewriting the rules of commerce, communication, and imagination.

Venture capital flooded into dot-com startups with no earnings, sometimes no revenue, on the thesis that the network economy demanded entirely new valuation frameworks. “Eyeballs,” not profits, was the one metric that mattered.

The Nasdaq rose 400% between 1995 and its March 2000 peak. Even mainstream blue-chip indexes climbed to historically extreme valuations, with the S&P 500 Index trading above 30 times earnings.

The dot-com bust of 2000 to 2002 deflated the speculative excess, but stocks had barely begun to recover when the housing bubble — inflated by lax lending standards, securitization of subprime mortgages, and the naïve assumption that home prices never fall nationally — imploded in 2007 to 2008.

The resulting financial crisis was the worst since the Great Depression: major financial institutions failed or required government rescue, credit markets froze, and the S&P 500 fell more than 50% from its 2007 high.

When the dust settled in early 2009, the index sat below its 1997 level. More than a decade of equity returns had been erased… twice.

In each of these lost-decade periods, we saw a high level of interest in tech stocks. We saw easy conditions that led to higher prices before the crash. Yet each period had a different recipe for investment success.

In the 1930s, gold performed well, although physical gold was confiscated in 1932. Despite that, investors could still own gold mining stocks. Cash and short-term T-bills held up well, thanks to the massive deflation in real terms.

In the 1970s, holding cash was economic suicide amid the high inflation. Investors could own gold mining stocks for part of the decade, then own gold again in the late 1970s, conveniently after the U.S. abandoned the gold standard.

In the 2000s, hard assets also had their moment. Following the tech bubble’s burst, real assets like oil, gold, and real estate had banner years. But real estate rapidly became a bubble itself, setting the stage for turning a tech drawdown into a true lost decade.

Note: Today’s Swan Dive was adapted in part from the analysis in our June 2026 Grey Swan Bulletin. If you want this in-depth research as soon as it’s available, click here to upgrade to a Grey Swan Investment Fraternity membership today.

~ Andrew Packer

P.S. Yesterday’s Grey Swan Live! with Shad Marquitz covered the essential commodity bedrock underpinning the AI buildout. Many critical materials, such as rare earths, are part of that story.

Plus, metals such as tungsten are also critical for national security and defense spending. And there’s a boom ahead for resource producers in North America that can supply those metals.

Shad broke down how he found companies like MP Materials before last year’s government investment, and the critical metals likely to see government support from Uncle Sam for national security purposes.

The replay is up on the site for members who missed out live yesterday. As usual, Shad provided a great shopping list for those looking to benefit from the AI buildout story.