The Butterfly Effect That Sparked the Dot-Com Boom Is Back

In July 1997, a butterfly flapped its wings in Thailand...

That's how Edward Norton Lorenz might have described it. He was the mathematician who popularized the "butterfly effect" – the idea that a butterfly flapping its wings could whip up a tornado in another part of the world.

The metaphor tells us that in a complex system, even a small change can cause ripples that eventually wreak havoc.

That's what happened in Thailand...

The Thai government devalued its currency... And 13 months later, the fate of the U.S. stock market – and the entire global economy – was in jeopardy.

Today, I'll share how that happened... and what it means for the stock market right now...

How Bad Times Create Market Booms

Market sentiment turned against Thailand in the late 1990s. The country's central bank failed to defend its currency from speculators and other pressures. So devaluation was the only option.

That kicked off a devastating chain of events...

By October 1997, the Thai baht had fallen by 60% versus the U.S. dollar. Neighboring currencies began to collapse. Suddenly, Southeast Asia was in a full-fledged financial crisis. And the dominoes just kept falling.

The global economy slowed... which pushed oil prices lower... which added to problems in Russia. In August 1998, Russia devalued its currency and defaulted on its debt.

The blowup quickly made its way around the globe... all the way to Greenwich, Connecticut.

That's where it found an upstart hedge fund. Today, everyone knows its name: Long-Term Capital Management ("LTCM").

LTCM was the brainchild of mathematicians. The fund took low-risk bets and used massive leverage to make big returns. It earned nearly 200% in profits from 1994 to 1997 with almost no volatility.

But LTCM's bets imploded when Russia defaulted. It lost 44% in August 1998 alone. The fund was going bust... And because it was leveraged around 30-to-1 (mostly through major U.S. banks), that quickly became the market's problem.

The S&P 500 Index fell by more than 15% in two months. The bull market at the time was clearly in its final stage. And the collapse looked like it could be the end.

Except that's not what happened...

As I'm sure you know, whenever the markets are in crisis, the government and the Federal Reserve do whatever it takes to stop the damage.

That's what happened in 1998. The Fed organized a multibank bailout of LTCM. More than a dozen financial institutions put $3.6 billion into the fund to effectively buy it out, preventing financial contagion.

The Fed also cut interest rates to ease financial conditions in the U.S. Money became cheaper and easier to come by. That fueled speculation.

Without the crisis in Thailand, the dot-com bubble would have never grown to the incredible heights we saw.

It was the butterfly effect in action. We got a crisis – and then a "Melt Up."

This cycle has repeated throughout history...

1. A small problem snowballs into a crisis...

2. The crisis triggers a major policy response...

3. Easy money sets the stage for a market mania.

It happened in 1998 with the dot-com boom... It happened again during the COVID-19 pandemic...

And it appears to be happening again today, even without a crisis.

This Policy Shift Could Create a Melt Up

You see, the Federal Reserve cut interest rates last month. The market expects two more cuts by the end of the year. And we'll likely see a lot more in 2026.

This is happening at a time when the U.S. economy is doing fine. GDP growth remains strong. Unemployment rates are low. And the U.S. stock market is soaring in response to rate cuts.

In other words, we're in the middle of a major policy response... even though we haven't had a crisis.

According to history, this is the set of circumstances that usually leads to a dramatic move higher in U.S. stocks. It's a crucial reason to be bullish today.

In the meantime, many investors are looking for reasons to worry. They're practically begging for a reason to sell. But the biggest risk today might be owning too few stocks.

Lower interest rates could soon turn this bull market into a full-blown Melt Up. Make sure you're positioned to profit when that happens.

Good investing,

Brett Eversole