When Everyone is in Agreement

“When all the experts and forecasts agree – something else is going to happen.”

– Bob Farrell, Wall Street Market Strategist

September and October have brought cooler weather and, along with it, volatility to the markets.  Neither are unexpected. Season are seasons, and September has historically been the weakest month of the year for stocks.[1] The S&P 500 ended September with a 4.8% decline which was only the second down month for 2021.  October is also considered to be a volatile month for investors. The 1929 “Black Tuesday” stock market crash occurred on October 29, 1929. The “Black Monday” Crash of 1987 took place on October 19, 1987.  And while the fall of Lehman Brothers technically started when the company filed for bankruptcy on September 15, 2008, October 2008 experienced major market declines as we steamrolled our way into the financial crisis. Even as recently as 2018, U.S. markets lost $2T in October.

At Richie Capital group, we don’t invest based on calendar trends or historical anomalies because they can’t be reliably predicted and, over the long term, these periods of volatility become minor blips in the rear-view mirror. The market has achieved major gains since we entered the current bull market from the depths of the covid crisis in March of 2020.  Since its recovery, the market has achieved 46 all-time highs. Throughout its run, market analysts (myself included) have consistently rung alarm bells regarding warning signs for the economy.  Everything from pending inflation, slowing economic growth, Fed tapering, Fed tightening, job losses, and asset bubbles have been suspected catalysts for a market slowdown.  Even now, many expect a significant downturn before the end of the year. Why hasn’t it happened yet?

There is an old saying that bull markets climb a “wall of worry”, meaning that the market seems to have an ability to show resilience in the face of economic or financial news that might otherwise spark a selloff.  The more headlines we see fomenting pending doom, the more reasons we can believe that the world may not end. As long as people are worried, there is caution baked in as there is money on the sidelines waiting to “buy the dip”. Even some of our existing clients have communicated that they have more money to invest as soon as the market turns.   A bull market isn’t necessarily a peaceful or calm place. Even during good times, investors are continuously nervous about how long the party will last, and if the next negative headline will stop the music. As investors, we should be more concerned when no one is worried and investors are all in.  

As I considered this concept, I recalled an adventure I experienced many years ago.  It was my one (and only) trip skydiving.  The event occurred at a skydiving school just outside of Atlanta, Georgia.  I recall waking up the morning of the jump neither nervous nor excited. I don’t consider myself to be much of thrill-seeker, and I rarely engage in such risky adventures. To keep myself from canceling, I tried not to think about the risks involved.  However, when we reached the school, I was forced to face the reality of what I had signed up for.

The on-site preparations were meticulous. We were each paired off with an instructor who would be attached to us for the tandem jump. We conducted walk throughs to understand how our bodies should be positioned throughout the various phases of the jump, and what we should do if any unforeseen circumstances arose. The instructor packed the main and backup parachutes while I watched and talked me through his preparations. Just before we boarded the plane, my instructor asked me, “Are you nervous?”  I admitted that I was. He said “Great!  Because if you weren’t nervous, then I would be concerned because that meant you probably weren’t paying attention.”

The post mortem on the jump was that I had an amazing time! But I am 95% sure that was my first and last jump. While the sense of “flying” and being able to see the globe from such an altitude was fun, I realized that I didn’t really relax and enjoy the experience until I landed safely and could confirm that I was still alive.  After the jump, as we waited for our jump videos to be developed, another fully loaded plane went up. As everyone on the ground watched, the next set of jumpers leaped from the plane. We then gasped in disbelief as two of the jumpers became entangled and descended with two partially inflated chutes. One didn’t survive, and the other ended up in intensive care. We later learned that these two jumpers were not associated with the school. They were both veterans with hundreds of jumps each, and they were merely hitching a ride up on the school’s plane. For those two skydivers, it was just another mundane jump. 

What is the lesson for investing?

There are always risks. And the greatest risks are those that are unseen and unpredictable in the form of an exogenous shock (e.g. an act of war or terrorism, a natural disaster, a pandemic).  Downturns are inevitable and should be expected. But the prospect of such an event shouldn’t scare us. It is part of the risk of investing. Those same risks make strong returns possible, especially if we are performing our due diligence and investing in strong companies. The most important lesson is that we are most at risk when we aren’t paying attention, and when everyone is in agreement. 

[1] A phenomenon called the September effect

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