Climbing the Wall of Worry – Zach Davidson
The phrase that the stock market ‘climbs a wall of worry’ is frequently mentioned in the media. But what does it really mean? It originally was an expression created in the 1950’s that depicts a sustained stock market rise during a time of economic, financial, or political stress in which stock prices are said to be ascending is a ‘wall of worry’. This sometimes arises from a herd mentality of investors who ‘buy on bad news’. Today’s often repeated refrain would be ‘buy the dip’. The phrase will be mentioned when stock markets run into a temporary stumbling block, rather than a permanent impediment to a market advance. The markets' ability to climb a wall of worry reflects investor confidence that these issues will be resolved at some point. From a contrarian standpoint, not having a wall of worry of events or issues to be concerned about can lead to an overheated market and complacency. Stocks will periodically need to reset expectations. Before Monday’s market selloff, the last time the S&P 500 fell 2% in a day was back in May. The index had been within 5% of its all-time high for the last 220 days. This streak was the 8th longest going back to 1950. Market corrections can and will happen and the reason is largely irrelevant for most investors.
This chart shows the S&P 500 annual returns and the maximum decline during ever year:
As we experience more downside volatility, investor worries will increase and we sometimes hear whether it’s time to ‘take profits’ and move to the sidelines. Of course, the second part of this decision and the more difficult part of that equation is if one decides to sell, when would be the time to reinvest? There won’t be any ‘news’ or an event at lower prices (the reason for the investor to sell is attempt to buy back at better prices than they sold) that gives the investor a heads up. Investor behavior often dictates when things go lower, investors instead patiently wait for things to go even lower. It’s very tough to time markets successfully. Stocks and markets do get overbought at times and then correct or consolidate those gains. But more often than not, winning stocks will go much higher than markets expect, over time.
This past Monday, bond markets did not move much as there was no significant flight of funds to safety. Currencies barely budged, gold did not perform well as a hedge, and oil held in well near its recent elevated levels, showing that the Evergrande shock, despite the company’s size, will be more impactful to Chinese investors and a stock market that has not performed well, for most of 2021.Having an investment plan is a great tool for reflecting during periods of market selloffs (not just 1-2 down days) and providing comfort that an investor is on track to meet their long-term goals.
If you would like to review your plan in more detail or have concerns, please let us know to discuss with any member of the team.