“Shares are not heavy objects kept aloft through strenuous effort. They are perpetual claim tickets on companies’ earnings and dividends."- Weston Wellington
“Stocks Head Back to Earth,” Wall Street Journal 2012
“Weird Science: Wall Street Repeals Law of Gravity,” Barron’s 2017
“low interest rates have “helped stock and bond markets defy gravity.” Los Angeles Times
"If you think the market is high now, wait until you see it in five years."- Nick Murray
Now that the financial markets have returned to their previous high and continue to go ever higher, investor’s concerns switch from the market being “too low” to being “too high.”
There is a reliable cycle in economics: boom and bust, expansion and recession. Many economists have studied this: why can’t the economy just grow slowly and steadily without the roller coaster ride? It is because every boom sets the stage for the next bust, and vice versa.
There is no clear line where the expectation of growth will meet with realities, so industry will continually push forward until it meets resistance, gets pushed back into line with current conditions, then resumes pushing forward again.
So, what is the original linguistic sin that is a stumbling block to successful investing? Where do investors get this idea that what goes up, must come down when hitting the “top” and decide to pull the ripcord at the expense of their goals?
The fear is not the regular push and pull of daily price valuations, but a burn-up-upon-reentry, no slowing-until-we-hit-the-ground crash! It has never happened before, but the logic of this language overrides history and probabilities.
The metaphor of gravity, ups and down, falling and climbing seems to be a red-handed culprit. No earthbound human is exempt from the laws of physics and using the language of gravity takes our understanding to a logical, but wrong, conclusion.
My 2024 resolution is to describe markets as the two-steps- forward-one-step-back process of continually pricing shares for buying and selling based on all available information, which I believe is still accurate without provoking the anxiety associated with falling off a building.
Here is the good news- the laws of physics do not apply to financial markets.
Pull backs, corrections, and ordinary daily fluctuations have many causes but are not the inevitable result of a new market high. There is no historical support for this belief other than the influence of the language we choose.
Continually reaching new market highs is not a cause for celebration or alarm- it should be expected. Why else would we invest?
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
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