A contributed perspective by Stephan J. Hess, CFP
Editor’s Note: This is another installment of a monthly series of contributed pieces addressing financial matters.
The market likes to climb a wall of worry as they say. This is one of those market phrases that you might hear tossed around from time to time, but if you are like me, this never seemed to logically make any sense. If people are fearful about something that is happening or is predicted to happen, why then, does the market sometimes drift higher, or climb a wall of worry, like many feel it is doing now. It defies common sense, or does it?
To understand this phenomenon, the first thing we need to do is to remember that market valuations are always a reflection of the supply and demand for something at any given moment. If more people want to buy stocks today, the values are going to go up. If there is more selling, then the values will go down. It’s that simple. It does not in any way mean that stock valuations are accurate or appropriate. In the last couple of months, the values of many stocks have been climbing and surprising many people. Some stocks are even hitting new highs. How could this be happening in the middle of a pandemic and economic crisis? Don’t people see all the problems that still exist? Actually, they do, but sometimes it just doesn’t matter.
Think about what happened in the lead up to Y2K. For you younger readers this was when computers around the world were supposedly going to all crash simultaneously because they could not make the transition from the year 1999 to 2000. It seems silly now but at the time it was a real thing, and many people were concerned that everything would come to a halt. In addition to stocking up on canned goods, many people took measures to protect their cash and investments. Those who were really worried even sold out of investments ahead of time so as not to be caught up in the impending doom. The market did get initially spooked and sold off, but crept higher the closer we got to Y2K. Since we have just established that you need more sellers and less buyers for the price of something to go down my question is this, where are the sellers going to come from if everyone who is concerned has already sold out?
Judo is a form of martial arts where if you successfully sidestep a powerful attacking force, your attacker may find themself temporarily off balance or out of position. With some targeted energy you could reciprocate with your own attack and quickly turn everything around. It might not even take that much energy at all. If most sellers who are going to sell are already gone, then arguably there is little resistance or selling energy remaining. It wouldn’t take much buying energy for the market to push higher. Again, this has nothing to do with the merits of whether the valuations are accurate or reasonable. Likely they are not but it doesn’t matter. For whatever mystical reason, the market seems to always move towards the path of least resistance like how high pressure always wants to find a balance with low pressure. It may take some work to get to this path of least resistance but when it does, there could be a lot of room to run.
Like most market behaviors, this wall climbing is but a temporary one that will eventually end. It may just lose steam and find a new and more sustainable equilibrium of buyers and sellers, or the rug could get totally pulled out from under it at any time. The market tends to gravitate towards the extremes and that is usually where you see a change of direction occur. This is a good general awareness to have. Both the lows and highs can get to be extremely pronounced and you will never receive a text, warning you that something is about to change.
The market doesn’t actually care that there is a pandemic going on or that restaurants and businesses in our community are struggling. It is an entirely unemotional thing. It doesn’t care about valuations and it certainly doesn’t care about what highly trained financial analysts predict will happen. Like with most odd market behaviors, most everything can be explained by understanding human psychology, unrestrained emotions, and herd mentality.
Stephan J. Hess, CFP®, is a CERTIFIED FINANCIAL PLANNER Professional and is the owner of Hess Financial in Harrisonburg. Neither he nor his company has any financial relationship with The Citizen or its publishers.