Daily Commentary

MarketMinder’s View: We don’t think everything in this meandering piece quite adds up, but there are some good points to highlight. First, though, a light criticism: While we appreciate that it tries to discern between investing and gambling and rightly excoriates products that try to blur the line, we don’t think it goes far enough in that. Friends: Investing isn’t gambling. It isn’t a game of chance. The stock market is not a casino. In a casino, games are designed so that the house wins, and none of them are a market function. The stock market, by contrast, rises much more often than it falls. While its short-term moves can be noisy, you can generally bank on it moving (up or down) over the mid to longer term based on how corporate earnings perform relative to expectations. When you buy a stock, you buy a slice of those earnings—nothing like a gamble. Now, with that out of the way, the salient points. One, yes and amen, prediction markets aren’t investment vehicles. They are speculative tools. Watch their movement to get a bead on sentiment if you like, but know that they are about gambling and dopamine, not building long-term wealth. Two, it is indeed important to watch out for flashy products and a bull market dulling your risk sensitivity. And, three, recency bias makes a lot of folks downplay how bad a bear market can be. “The last brutal bear market in stocks ended 17 years ago last month—most of a lifetime for many young investors. Between Oct. 9, 2007, and March 9, 2009, the S&P 500 lost 55.3%, including reinvested dividends. That bashed every dollar down to less than 45 cents. The S&P 500 didn’t recover and stay above its 2007 high until the end of 2012.” The bear markets since have been either sharp and short (2020’s COVID lockdowns) or shallow and sentiment-fueled (2022). It is quite likely the next brutal bear market will catch folks off guard, potentially making its panicky final throes very bad. That isn’t an action item today, but preparing mentally for the next bear market is a good practice.

MarketMinder’s View: If you have an emotion, the financial industry has a costly product to tickle it, and buffer ETFs are no exception. “Buffer ETFs are often sold as a core, long-term investment comparable to index funds — and even better, a smart insurance policy against the ravages of markets. The reality is that they are a gamble, no different than speculating on options or futures or short-term bets on individual stocks.” Often based on indexes like the S&P 500, they claim to cushion against volatility. In reality, they cap downside and upside, lowering your long-term returns since markets rise much more often than they fall. The article demonstrates this by comparing the S&P 500’s long-term return with a hypothetical buffer-type strategy since 1928, finding the index’s return roughly doubled the buffer strategy in price terms and more than tripled it once factoring in reinvested dividends. Maybe you think that is because stock indexes aren’t volatile enough to warrant the treatment? “Counterintuitively, the more volatile an asset, and the more protection one would presumably want, the less a buffer strategy makes sense because the asset’s returns too often fall outside the buffer and cap. The resulting payoff is asymmetric: Investors have limited upside but unlimited downside.” Yet newfangled bond buffer ETFs lag badly, too, in large part because “buffer ETFs are unlikely to distribute even half the bonds’ interest because most of it pays for the options underlying the strategy.” Whatever your goals are, you should be able to reach them with liquid, low-cost assets (e.g., stocks, bonds and cash), not an overly complicated security that plays on your emotions. Too often, those cut against your goals anyway. For more, please see our commentary, “Why Buffer ETFs Aren’t All They Are Cracked Up to Be.”

MarketMinder’s View: Friendly reminder, folks: Don’t get hung up on day-to-day news whether you think it is good or bad news. Because while Iran declared the Strait of Hormuz open to all traffic today, things look more complicated than that—which the article details. “Shipping traffic in the Strait of Hormuz could resume ‘on the coordinated route as already announced’ by Iran’s Ports and Maritime Organization, [Iranian Foreign Minister Abbas] Araghchi said. It’s unclear whether this means that vessels will need to pay a toll for using the strait.” That “coordinated route already announced” also happens to be a narrow passage that hugs the Iranian coastline and veers quite close to two giant rocks, which raises the risk of collisions and has, thus far, been too dicey for maritime insurers to cover. Old fashioned risk management may keep traffic blocked or limited even if it is officially open, especially with the traditional shipping lane—which is wider and runs closer to Oman—potentially mined. Now, we still think the Strait likely opens for real faster than people expect, and we don’t think this is a long-term economic or market negative. The world is already adapting to the bottleneck, and markets’ return to all-time highs despite the closure suggests stocks are looking forward. But we don’t think investors benefit from dwelling on daily news. In reality, a lot of it just extends the status quo.