Our Perspective on the ‘Rocky Week’ You Might Have Missed

Last Friday, July 16, the S&P 500 Index closed at 4,327.16.^[i] If you had made like Rip Van Winkle from that moment through yesterday’s close, you would likely have awakened and surmised you missed a pretty “meh”-yet-up span, with the index finishing Thursday at 4,367.48, a gain of 0.9%.^[ii] [Yawn.] But those who weren’t taking an extended snooze may have had a different experience. After Monday’s -1.6% selloff (which was more than -2% intraday), pundits from Australia to Austria and pretty much all points in between argued this represented the Delta variant giving “investors a reality check”—a prelude to worse.^[iii] In our view, this is emblematic of 2021’s dominant sentiment feature: myopia. Investors would do well to remember this week the next time one or two volatile days throws commentators for a loop.

First, to be clear, we get it: Rising caseloads tied to the Delta variant aren’t good. This is perhaps most true in the developing world, where vaccines, treatments and overall medical care are scarce. But even in the developed world, caseloads are on the rise, and many fear it will get worse before it gets better.

However, for investors, it is worth remembering: Caseloads alone didn’t bring the downturn we saw in early 2020. Lockdowns, then a major, unprecedented shock that suddenly interrupted economic activity, were behind it, in our view. Even when a vast rise in caseloads led governments to bring lockdowns back last autumn and winter, investors weren’t caught wrong-footed. Why? Efficient markets weigh all manner of opinions. They hear talk of variants, waves, the disappointing “Freedom Day” in Britain and more. They have heard all the similar talk for months. Hence, we don’t think markets ever expected a smooth slope to recovery.

Stocks aren’t blissfully ignorant, as so many seem to cast them. They are simply coldhearted. In our view, they deal with widely publicized issues near-immediately and move on, looking ahead to what the next 3 – 30 months likely hold for company profits. While some regions, like Los Angeles County, are bringing back mask mandates—and chatter about other areas following suit simmers—there is little to no sign a March 2020-style lockdown looms. There is no probable sign a bear market (a fundamentally driven decline exceeding -20%) is in the offing. Heck, we began Friday a rounding error from record highs set just days ago.

Some of the myopia is understandable, if counterproductive. We have all been through a pretty excruciating 17 months since last February, including a record-fast trip from all-time highs to bear market lows—and back! Some folks’ nerves have likely worn thin. The news flow has felt frantic at times.

Fisher Investments Founder and Executive Chairman Ken Fisher calls the stock market “The Great Humiliator,” or TGH, and these are great tools for it to toy with investors’ emotions. It used the speed of 2020’s decline to amp up investors’ myopic tendencies. As a result, every wobble feels monumental. Pundits, even those who should know better, fuel it more by piling on. You can see this when so many headlines and articles extrapolate a single day’s decline with a historically insignificant magnitude—like Monday’s drop, which was the biggest since … May 12, itself a date with no notable significance.^[iv] 

If you need equity-like longer-term returns (for some or part of your portfolio) to finance your long-term needs, we think it behooves you to stick it to TGH by refusing to succumb to its tricks. Right now, TGH’s favorite weapon seems to be myopia. So tune it down and look farther out. Look to the high likelihood that society is even better at living with COVID 12 to 18 months from now than it is today. Look to the low likelihood there is a multi-trillion dollar shock lurking now stocks haven’t already mulled over for months.

The Rip Van Winkle approach isn’t best for all times. But sometimes, when pundits are hyping every volatile day as the shot heard ‘round the world, we suspect it has a lot of merit.