Financial markets aren’t woolly mammoths: Running from fear can be counterproductive

American humorist Mark Twain once quipped, “I have been through
some terrible things in my life, some of which actually happened.” The same can
be said of investors. Investors often waste precious time and valuable energy
worrying about everything, but how many look back to see if what they were
worried about in the past ever occurred?

The reality of many of these terrible things is that A) they were
imagined in the first place, or B) they were manageable. The ability of stocks
to overcome investors’ concerns has inspired a common phrase: “Climbing a wall
of worry.” We’ve seen this in action time and again across the world:

these walls of worry?

  • Remember the widespread concern about the
    Federal Reserve’s monetary policy response to the financial crisis? A decade
    ago, investors worried that the Fed’s policy, which was designed to combat
    deep-rooted deflationary impulses, was going to be “massively inflationary,”
    thereby leading to a spike in US interest rates and depressed equity valuations.
    But in reality, inflation has remained stubbornly low throughout the cycle,1
    US rates have hovered near 2%,2 and US equity indices have been hitting
    new record highs almost consistently since 2012, with the S&P 500 Index recently
    closing above 3,000 for the first time ever.3
  • Remember the panic over the US Patient
    Protection and Affordable Care Act of 2010? In particular, investors were
    concerned that mandating businesses with 50 or more full-time employees to
    offer health insurance was going to cripple job creation. But as of this June, there
    were a record 151 million Americans on corporate payrolls,4 and 46.7
    million of them work for companies with 49-500 employees.5 That too,
    is an all-time high. Further, the number of job openings was also near an
    all-time high as of May, outpacing job hires every month since 2014.6
  • Remember when the far-left Syriza party’s victory
    in the 2015 Greek election was projected to lead to a mass exit from the
    eurozone? First by Greece, with other peripheral European countries following
    suit? This was a big story. For a moment, I knew more about Greek politics than
    I ever imagined. But those fears didn’t come to pass. In early July, the “mainstream,”
    “business-friendly,” “pro Europe” center-right opposition party New Democracy
    won the general election. And Greece is now funding its “crushing” debt burden
    at sub-2.5% interest rates.7   

Just this year, we’ve encountered several walls of worry. Six
months ago, we worried about Fed tightening, but now the Fed is
expected to ease rates.
 In May,
we worried about US tariffs on Mexican goods, then the Trump administration suspended
the tariffs. At the beginning of July, we worried about the inverted yield
curve, but the spread between the 10-year US Treasury rate and the 1-month US
Treasury rate was essentially flat by mid-month.8 I can go on and
on, but you get the point.

down our walls of worry

It’s not our faults. Evolutionary biologists deduce that for most
of human history, anxiety and worry were emotions that served humans well — if
you see a woolly mammoth, you run. Unfortunately, we are still wired to respond
to perceived immediate danger even if our societal goals are much longer term
in nature (for example, work hard and get a paycheck in two weeks; save money
and retire in 20 years). I believe the problem for investors, given that money
has time value, is that the more that we overreact to immediate dangers, then
the less likely we are to meet our long-term goals.

So how did I learn to stop worrying and love the market gyrations
and the 24-hour news cycle? I haven’t completely. However, I reduce my worry by
studying market history (the long-term trends versus the short-term blips) and
reminding myself of each of the terrible things (for example, hyperinflation,
US jobs recession, eurozone breakup) that never did happen. I document the
purpose of my money in a family investment policy statement and articulate in
that document that my family is not to break from our well-crafted investment
plan based on whims. It’s helpful to reread the statement when volatility
arises. I believe other investors may find value in working with their financial
advisors to craft policy statements and reminding themselves of their portfolio’s
purpose and mission in times of volatility. 

In the meantime, I take solace knowing that my family is increasingly
closer to its long-term goals, and that there is no predator waiting for me on
my commute home from work.   

1 Source: Bureau of Labor Statistics,
June 2019. Inflation represented by the US Consumer Price Index Urban Consumers,
which is a measure of the
average change over time in the prices
paid by urban consumers for a
market basket of consumer goods
and services.

2 Source: Bloomberg, L.P. July 11,

3 Sources: Standard & Poor’s,
Bloomberg, L.P., July 2019

Source: Bureau of Labor Statistics, June 2019

Source: ADP National Employment Report Private Nonfarm Payrolls Medium Firms
(50-499), June 2019

Source: Bureau of Labor Statistics Job Openings and Labor Turnover Survey, May

7 Source: Bloomberg, L.P. July 11,

8 Source: Bloomberg, L.P. July 11,
2019. The shape of the yield curve, in this instance, is represented by the
rate differential between the 10-year US Treasury rate and the 1-month US
Treasury rate.

Important information

Blog header image: Andy Beales /

An inverted yield curve is one in which
shorter-term bonds have a higher yield than longer-term bonds of the same
credit quality. In a normal yield curve, longer-term bonds have a higher yield.
The difference between these two values is referred to as a spread.

The opinions referenced above
are those of Brian Levitt as of July 22, 2019. These
comments should not be construed as recommendations, but as an illustration of
broader themes. Forward-looking statements are not guarantees of future
results. They involve risks, uncertainties and assumptions; there can be no
assurance that actual results will not differ materially from expectations.

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