Silly Season and Psychology
3rd Quarter 2022 Commentary • Kori Allen, CFP®
About a month ago, before the most recent market gyrations, a well-heeled and regarded investment firm was being chastised for calling the fall, “silly season”. The focus on the choice of words seemed petty, but reasons pronouncing silliness bears consideration.
Our attention spans have become shorter, simpler, and lazier. With social media and “news” (generally not journalism) delivered via Twitter or elsewhere, we tend to draw conclusions and extrapolate meaning from very thin threads.
Silly season pertains to the election cycle where people ascribe one party or other, better for the economy, stock market or wallets. In truth, the markets prefer predictability and, in the past, the United States’ slow process of policymaking, with checks, balances and minority representation, delivered. The Economist Intelligence Unit, a division of The Economist publication based in the UK, started publishing a Democracy Index in 2006. In 2020 the United States dropped from a full democracy to a flawed democracy. Currently the US is ranked 25th in the world, for democracy. We are becoming less predictable as is our dysfunction. For context:
Full democracies:
Civil liberties and fundamental political freedoms are respected
Valid systems of government checks and balances exist
There are limited problems in democratic functioning
Media is diverse and independent
Flawed democracies:
Elections are fair and free
Basic liberties are honored but may have issues
There are issues in the functioning of governance
John Dick, CEO of CivicScience, says media amplifies extremes. In a recent study they found that people self-identify: 19% as “strong Democrat”; 18% “strong Republican” and 63% as “moderate/somewhere in the middle”. (https://www.newsnationnow.com/cuomo-show/does-social-media-reflect-what-americans-are-thinking/). His organization also illustrated that identifying with one “tribe” will color the sense of reality and economic satisfaction or worry. The 63% in the middle is “boring” and does not garner much media attention, weight, nor traction (trending), so these minority numbers, on opposite poles, have an outsized influence on perception.
Investing is based on numbers and long-term trends. In the short-term, volatility is directed by conjecture fueled by fear or greed. Our amygdalas have been on overdrive for several years now, and amid short media blips of information, it’s easy to remain reactive.
Societal, economic and market woes develop over time and resolve over time and our attitudes and reactions help drive the speed and evolution. For better outcomes, we need to slow down, demand and digest more nuanced information.
This silly season, more candidates are running on what they are not, or to which tribe they affiliate. Demand that candidates outline their proposals, describe how they will govern, and don’t accept simple political proclamations of party or demigod affiliation. Demand that the 63% in the middle be represented by thoughtful deliberation and compromise. Consume media that outlines facts not opinions. Test your assumptions and beliefs by having civil conversations. Don’t forget to vote.
While watching the markets be critical of news. What does the Dow being down a certain number of points mean to you and your investment goals? Is there a bigger picture you should consider? Are you watching a trend or focusing on a particular date? What is your timeline to reach your goals?
Did you know?
The Forward Price to Earnings (P/E) ratio (a measurement of a stock or index valuation) is below the 25-year average as of 10/5/2022.
Company earnings growth has increased 5.3% year to date (earnings growth ultimately drives a stock price).
32 of the last 42 years the market (S & P 500) has been positive. The average intra-year drop has been 14%. The S & P 500 has exceeded this, as of October 5th, down 25% year to date.
Since 1929 the average duration of a bear market has been 20 months, and the average bull, 51.
Since 1921 the average economic expansion has lasted 47 months, and recessions lasted an average of 14 months.
The US economy is 68.4% consumption. Consumer sentiment moved upwards in September after matching a 1980 low in August.
NBER (National Bureau of Economic Research) is responsible for proclaiming a recession. Their measurements to determine a recession have been improving since June.
Headline inflation peaked at 9.1% in June 2022 and has come down to 8.3% in August.
High yield bond default rate has averaged 3.59% since 1990. It is currently 1.57%.
Global supply chain delivery times improved dramatically from August to September.
(In the spirit of this commentary, only positive statistics are being shared, purposefully.)
Cycles are part of nature, our politics, and the markets. With the markets, we usually overshoot on the up and down swings before settling back to a mean. Checks and balances, embedded in our democracy, allows governance to operate within a band of norms. Our democracy hinges on the middle 63%—the boring middle. Our attitudes will define our behavior and our behavior will influence outcomes. Without hope, positive momentum or change cannot occur.
“Faith and doubt both are needed— not as antagonists but working side by side to take us around the unknown curve.”
—Lillian Smith
Disclosure: This commentary was prepared as general communication between Pearl Wealth and its clients. Financial plans and investment portfolios should be tailored to an individual’s unique circumstance; therefore, this should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any security in particular. This material is strictly for illustrative, educational, or information purposes and is subject to change as conditions vary. Investment involves risk, including possible loss of principal.