Myopia in the Zeitgeist

Too far, too fast, is a pretty common phrase after stocks enjoy a nice run, so we aren’t surprised to see it everywhere this week, as Q3 winds down. Sometimes it is a statement, others, a question. But we were a little perplexed by a Wall Street Journal linkwrap on this general theme, whose headline asked: “Are there any stock-market gains left for the fourth quarter?”^[i] Then we did some Internet sleuthing to see if this topic had legs, and we found a slew of headlines arguing for—and others against—a strong Q4. Look, friends, we are bullish, but we also don’t think anyone can have the faintest clue what stocks will do over any three-month stretch. Thinking so short-term is a fool’s errand.

For one, stocks don’t have some fixed ceiling for full-year gains. If you look at any record of historical annual returns, you will see they are all over the map. The MSCI World Index’s full-year returns start with 1970. Those range from an excruciating -40.7% drop (2008) to a joyous 41.9% boom (1986).^[ii] Of the 55 full years in the books thus far, 22 of them topped the index’s year-to-date return through Monday’s close, 16.9%.^[iii] That would suggest there is not some magical allotment the market has used up. The annual return grinch is not about to pluck away untapped potential. This bull market, like all bull markets, will run on until it reaches its natural euphoric end or something huge, unseen and ugly wallops it sooner. We don’t see such a wallop looming, but should it strike, the calendar and preceding year-to-date gains will be irrelevant.

Yet this doesn’t dictate that stocks will rise in Q4, for a simple reason: Short-term volatility is always possible, for any or no reason. That entails the risk of sudden pullbacks and sentiment-induced corrections—those sharp, painful drops of -10% to -20%. We endured one this spring, with the worst coming in Liberation Day’s aftermath. That doesn’t render another this year impossible. Twin corrections have struck before, including in 2011 and 2018. And, again, they can happen at any time, for any or no reason. Hence, they are impossible to predict.

Heck, all short-term moves are impossible to foresee. Anyone who does got lucky and probably didn’t do it repeatedly. Sentiment—feelings—is just too big a factor affecting returns from day to day and week to week. Feelings are fickle. Sometimes a big scare story hits the market alongside headlines. Sometimes the market sees the headlines and yawns. Sometimes traders do short-term trader things and the market has a big move and no one cares. And sometimes it sparks panic and you get a few more bad days. A bad economic report that hit sentiment in January might be a non-event in November. You just don’t know.

Ben Graham, legendary investor and godfather of security analysis, once observed that in the short term, the stock market is a voting machine. A register of feelings! Only in the longer term is it a weighing machine, considering carefully how reality is likely to unfold relative to expectations. Another way to say this is that as time marches on and we look back at returns, we see all those short-term wobbles netted out into a general trend up, down or very occasionally sideways. That trend is the weighing. The voting is that noise you see when you zoom in.

A three-month stretch will always be noise in this grand scheme of things. Focusing there is myopic. We can—and do—observe that there is a lot of myopia in the zeitgeist right now, which tells us some skepticism lingers in the marketplace even as sentiment warms. Universally optimistic investors tend to focus on the long term en masse. Skepticism, however faint, is what prompts questions like, will we get another good quarter before the party ends? Does this year have any more gas left in the tank? Can the AI boomlet run maybe a smidge longer?

So we are encouraged by the same headlines that befuddle us. They show there is still some wall of worry for this bull market to climb. Do yourself a favor: Focus on that and let others worry about what happens in Q4.