Beware Overthinking the Markets

We often talk about the need to have perspective in the markets. Obviously you need a certain level of information to make informed decisions, but there comes a point where you have enough, everything else is just noise. This seems more prevalent then ever, as almost daily we are bombarded with headlines detailing political strife, volatile markets, and economic forecasts of doom and gloom. Yet, we are currently sitting on record high numbers for the S&P500. With that in mind, here are two excellent points worth sharing made by Mark Dow on his blog Behavioural Macro:

“1.       Disaster Myopia. We are still living in the long shadow of the global financial crisis. Six years have passed, but we still return to ‘that place’ far too quickly. Worst case scenario, daily. This ease of recall induces us to over forecast tail events—even if Macroggeddon is 0 for 500 by now. Erring on the side of optimism is still the money trade.

2.       Longest, shallowest cycle ever. The world continues its deleveraging. The US appears to be leading the rest of the world in the process.  But the extrapolation of growth optimism on which all cycles end is just not there in the US—or anywhere else for that matter. And it doesn’t seem imminent, either. This implies two things: (1) the odds of a new recession in the US are low (you can’t commit suicide jumping out of the basement window), and (2) since bear markets typically come when economic cycles turn, a bear market in US equities is unlikely until the economy gets jacked up on excessive investment and hiring.

Yes, a lot of nuance is lost in these two points. But a lot of noise is left out too. Remember, it is easy to find reasons to sell; what’s hard is finding reasons not to every single day. Experienced investors know that riding winners is far harder than cutting losses. So, when your core theses prove broadly right, they are worth clinging to. It’s your best defense against getting chopped up and lost in the weeds.”

Yes there will be bad news from time to time, heck you could easily sparse the internet and find fresh bad news daily (if you’re into that kind of thing). But that shouldn’t change your overall outlook. As we often say here at AFT Trivest, “It’s not about timing the market, it’s about time in the market.” History has shown that being long in the markets is the way to build long term success, but it doesn’t hurt to get a reminder of that every now and then.


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