Addressing “This Time It’s Different”

The stock market has been volatile lately.  This isn’t the first time.  Because we have enjoyed a long bull market, there are some investors who have never seen a down market before.  People often panic, thinking the end of the world is at hand.  How can you talk them off the ledge?

  1. There has (almost) always been unrest.  We are concerned about tensions at the Ukrainian border, conflicts and tensions in different parts of the world.  According to the New York Times, the world has been at peace for about 268 days out of the past 3,400 years. (1)  Life continues and business continues, unless you are in the part of the world having those problems.
  2. Everyone is upset when the stock market declines.  TV news leads with the story.  Clients watch their stocks on their phones or their computers.  They are glued to their screens.  Put things into perspective.  Traffic doesn’t stop.  Everyone on the street isn’t standing staring at illuminated billboards showing stock market prices.  Most people are going on with their regular daily activities.  Some don’t even think it directly affects them.
  3. No tree grows to the sky.  The stock market has traditionally returned about 10% annually on a historical basis.  If the market has a run of several years exceeding 10%, it often has a few years of lower returns to bring the historic return back to the traditional range.  The bad times generally don’t last forever.
  4. The market often does the opposite of what the majority think.  It’s been said “The market climbs a wall of worry.”  If everyone agrees the market has no place to go but up, that’s a bad sign.  People have been saying TINA, short for There Is No Alternative.  The money that comes out of the market has to go somewhere?  Where?
  5. There’s a difference between inflation and price gouging.  You see prices going up in stores and restaurants, but some businesses are seeing how much they can get away with when pushing prices up.  Eventually competition bring prices back to where they should be.
  6. The positive side of increasing oil prices.  Eventually we need to get away from fossil fuels.  This won’t happen overnight.  We use a lot of oil in the meantime.  As oil prices go up, wells that were uneconomical to use suddenly become viable.  Shale oil/fracking are suddenly profitable.  Generating energy through wind power and solar energy become affordable alternatives.  Opportunities present themselves.
  7. Technology brings prices down.  Electric cars are still a new industry.  People ask questions about charging stations and battery capacity.  These problems tend to solve themselves over time, because we are an innovative nation with innovative companies.  Look how prices came down on flatscreen TVs and laptop computers.
  8. Higher prices in stores breed competition.  IKEA, Primark, Lidl and ALDI are firms that brough prices down in household goods, clothing and groceries.  If dealers are charging a premium over list price when selling new cars, another car company will figure out how to ramp up supply and win customers away.  When there is money to be made, new competitors enter the market, driving down prices.
  9. Companies have dealt with labor shortages before.  In the 1960’s, Hollywood movies had plot lines about automation taking away factory and office jobs.  Your local supermarket has self service checkout lanes.  EZPass has reduced the number of toll booth personnel.  Fast forward a few decades and American companies were shifting manufacturing overseas.  American companies have either found people to do the jobs or freed up part of their workforce by automating or outsourcing manufacturing.  This problem has been solved before.
  10. Higher interest rates have a silver lining.  Low interest rates are great if you are getting a mortgage, but bad if you are living on a fixed income.  If interest rates increase, it will make life in retirement a lot easier for many people.  The stock market has good historical rates of return, but many people don’t want volatility.  They would prefer buying a bond, collecting interest and getting their principal back later.
  11. Companies are great at moving around manufacturing.  Many things we buy every weekend are made overseas.  Why?  Because labor costs are low and the quality meets expectations.  As developing countries mature and develop a middle class, wages usually go up.  Companies often move manufacturing to another country that’s eager to get the same economic benefit.
  12. Nature abhors a vacuum.  Remember when hand sanitizer and N95 masks were in short supply?  Toilet paper too.  What happened?  Suddenly new supply sources opened up.  It was everywhere!  Around Christmas and New Year’s home COVID testing kits were in short supply.  Today (1/24) the pharmacy in my local supermarket had boxes of them stacked on the counter.  If there is money to be made because something is in short supply, someone will see opportunity and meet the demand.
  13. The virus will probably be brought under control.  TV news leads with COVID numbers every morning, but after two years, we’ve all learned a few things.  Countries are relaxing their travel restrictions.  People are taking precautions.  If the virus doesn’t go away, we will probably develop a way to live with it and lead normal lives with minimal disruption.

There are many reasons for clients to be pessimistic.  In most cases, this is something we’ve seen before.  When we look back in hindsight, we may wonder why we were so upset at the time.

Related: What Does Good Client Communication Mean?

(1) https://www.nytimes.com/2003/07/06/books/chapters/what-every-person-should-know-about-war.html#:~:text=Has%20the%20world%20ever%20been,wars%20in%20the%20twentieth%20century.