Markets seem to be taking a breather after a very hot start to the year. The S&P 500, Dow and NASDAQ are all trading near highs, while the small cap index as measured by the Russell 2000 remains 20% away. Talk of overconcentration seems to have subsided a bit with areas such as industrials, materials and even health care making new highs.

This week the Producer Price Index (PPI) was reported slightly higher than expected, insinuating that inflation may remain sticky and thus delay the anticipated interest rate cuts investors have been hoping for. Stocks sold off on this news and my suspicion is that this may present some much needed and welcomed digestion of the recent run.

Despite the rebound in markets since the 2022 lows, I continue to be fascinated by the negativity I feel and hear every single day. With so much uncertainty in the future surrounding wars, inflation, debt as well as an upcoming election, the fear and pessimism certainly make sense, however throughout my time in the business, higher stock prices tend to fuel a touch of greed within investors as they begin to set fears aside and embrace risk, reaching for return. While this experience is certainly anecdotal, it is typically around this time, just when investors are prepared to throw caution to the wind, one must become a bit concerned and rather than increase risk, look to do just the opposite. So far, that has not happened.

I’ve often wondered what it will take for people to embrace risk in the current market and I always come back to the general idea that certain unknowns must be resolved before the stock waters once again look and feel safe.

The election for example is a big one, however that is not until November and if recent history is any indication, it may take weeks or months for a clear winner. My guess is that many people on the sidelines have resolved to wait until this event is out of the way before re-entering the market.

Or maybe people are comfortable in their money market accounts earning a respectable rate and won’t move until they are forced out by lower interest rates. This makes logical sense, however in my opinion, by the time rates are in fact much lower, stocks more than likely would have advanced to levels no longer attractive from a valuation standpoint.

Whatever the catalyst, when the masses are finally comfortable to move off the sidelines, rather than fuel the next major leg higher, our belief is we may be closer to a top than a continued bull.

Have you ever wondered why the average investors returns are so poor? It’s really quite simple, they buy at the top when they feel good and sell at the bottom when they’re scared.

When I first entered the business 24 years ago, I thought it was savvy stock picking that made the difference in investing. I loved to study the likes of Warren Buffet and Peter Lynch. I assumed, like many, that the only way to succeed in markets was to find the right companies, the hidden gems and uncover something others had overlooked.

As time went on however and my client base grew, I found myself spending more time counseling people who wanted to make poor emotional decisions rather than stay the course. I quickly learned that success had very little to do with individual stock selection and much more to do with controlling one’s own emotions despite the highs and lows of ever changing market landscape.

I first saw this after the peak of the dot-com boom when greed was still driving the investment bus for most people and despite companies with terrible fundamentals, most making no money, people desired to buy beaten down high-fliers such as JDS Uniphase simply because they thought they would ‘go back up.’  Most of those companies went straight to zero.

Just a few years later the US faced 9/11 and continued to suffer under the post tech boom, while the Dow traded down to 7,200. Many great American companies traded for pennies on the dollar and finally presented fantastic value yet when I spoke with investors, they wanted nothing to do with them. Fear had taken over and the carnal spirits from the Dot Com age were long gone.

Most gave up on stocks around this time venturing into the perceived safety and consistency of Real Estate. Rates had been taken to basement levels and banks were more than willing to lend lend lend. Real Estate became the playground as houses were bought on spec, flipped for fun and everyone decided to enter the game. The water was warm, the mood was spirited and heck, the pervasive opinion from  my vantage point at that time was ‘Real Estate never goes down…’

At the depths of the Financial Crisis no one wanted anything. They didn’t want Real Estate, Stocks, Bonds, nothing. The financial system grinded to a halt and investors were shell shocked.

Of course just at that moment, stocks went on a historic rise as the Dow moved from a low of around 6,000 to over 29,000 over the next decade. It was good to be an investor.

Covid shook us once again as fear became as thick as I’ve ever seen it. The short-lived rebound that followed was then met by the 2022 bear market where both stocks and bonds fell in tandem.

Despite all this, markets once again trade at highs with the Dow over 39,000. To say markets are resilient may be the biggest understatement of the year.

Throughout it all I’ve learned a very basic common truth. If you can control your emotions and remain calm when others are panicking, calm when others are becoming greedy, it has been my experience you stand a much better chance to enjoy the bountiful returns markets have provided over the years.

On one hand I’m glad to not see or feel the euphoria you often feel when stocks are running however the continued fear and trepidation leads me to believe we have much farther to go.

Until next time

~ Quint


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