The stock markets have recovered of late, gaining back at least some of the losses from 2018 in a way that by now has become a familiar for investors.
Every day we hear confident reasons for why stocks (and sometimes bonds) are being bought and sold indiscriminately. In reality, each violent move down or up has its own blend of catalysts. In October of last year, it was the rapid rise of interest rates that was top of mind, then it was trade talks with China. Or was it domestic policy? Or the credit markets?
In reality it is always a dose of those things and many more that create a soup of emotion and action, leading to both good and bad short-term trends.
So, the answer to why the market is up or down is simple: The markets don’t follow rules like physics, they are more like biology. Here is why:
- In physics there are laws that state the unchanging and absolute relationships between elements. Newton’s Third Law says for every action there is an equal and opposite reaction. If this were true in the markets, we would be able to predict with certainty what would happen to stocks when every piece of news crosses the wire. We know that is not the case.
- In biology, there are very few rules, only systems that change as conditions change. There are guiding principles, but always with exceptions, which means that there is room for uncertainty. The human body, for example, has interconnected cardiovascular, muscular and skeletal systems that are impacted by the overall health of the person. One person’s cold is another’s pneumonia. Same inputs, different outcomes.
The markets are biological because they process new inputs every day and react in sometimes unpredictable ways.
There is money in motion serving as the lifeblood or oxygen that feeds the global economy. There is economic growth in some places, political turmoil in others, and emotion underpinning it all. But like any other biological system, there is always potential for something to go wrong.
For the most part, the market system can fight off disease, but sometimes the viruses and bacteria gain the upper hand in the form of risk and fear. Even if the global economy is healthy, it can still catch fevers from time to time.
How, then, to invest in such a biological system? Think like a physician.
- Know the health of your own system and improve it. A personal balance sheet with sufficient cash and manageable debt can immunize against market risks that are out of our control.
- Be humble enough to know that you can’t prepare for all possible circumstances. If we spent all of our energy preparing for one illness, we may be ignoring another that could be far worse.
- Be sure to diagnose before leaping to treatment. If the markets are dropping, take the time to understand first how it impacts you, if at all. Observe the present conditions because they can give us clues. Then determine if the reasons for the drop are cause to make changes in the way you are invested.
- Recognize that there is no panacea, no one thing that will cure it all. There will always be those offering a remedy for all conditions, but such a thing does not exist. Your treatment necessarily will be different from your neighbor, your family, and almost everyone else.
- Stop listening to TV doctors.
A physician recognizes that while practices like diet and exercise can increase the odds of a healthy life, personal diagnosis and treatment are required when challenges arise. Financial advice is much the same. It should recognize the complex biology of our relationship with money.
Dennis Morton is founder and principal at Morton Brown Family Wealth, a wealth management firm in Allentown. He can be reached at email@example.com.