Hearing Hoofbeats – Think Horses, Not Zebras

Dear Clients and Friends,

The art of medicine is best practiced by using probabilities to diagnose and treat disorders and diseases. When patients present to practitioners of medicine, often there is incomplete evidence on how to proceed with diagnosis and treatment – ergo the differential diagnosis ranks potential outcomes on a probability rather than hunch or speculation. Diagnosing and treating the markets and economy is very similar, there are a number of outcomes and potential treatments, but it is hard to know with absolute certainty how to best treat. The common refrain from an experienced practitioner of medicine, when faced with conflicting data will be, “When you hear hoofbeats, think horses not zebras”. This means, common things are common, and when faced with rare vs. common, always think common until proven otherwise. Today our markets are suffering through a garden variety correction, which has the potential to turn into a ‘common bear market’. Anyone telling you otherwise is simply hearing Zebras rather than Horses.

Since 1945 the Market has sustained a Bear Market every 5.4 years – and this should be described as “common”. They are common enough that almost every retiree will live though 4-6 bear markets. Since 1929 our economy has sustained 26 Bear Markets, but only 15 recessions, so not every bear market is accompanied with a recession. A bear market without a recession is not as common, but definitely not rare. What is also common for market participants is volatility – best described as the movement of stocks up and down. Periods of low volatility are actually rare, and volatility is more common, but this fact seems elusive to market participants in times of heightened volatility. What we have today is a common, garden variety correction that could easily turn into a bear market. Many are going to argue that we are already in a bear market, but the indexes haven’t quite taken us there.

For the last 3 years our markets and economy have faced some extraordinary challenges and the government and Federal Reserve have responded with significant force. Today we are facing the result of these policies, and both the public and the market are not happy with the results. Those in the financial business tend to get excited about market movements, similar to a young medical student viewing a rare disease state for the first time; when you are really interested in something you rejoice upon finally experiencing the ‘real thing’. Our interest in the market is correlated to how well the market produces returnswhen things go in the opposite direction and produce losses, we tend to pay more attention. When markets go bad, doing nothing seems like a bad option, and there are many in the financial press that know this and prey on that desire to do something. In addition, fear drives business for certain parts of the financial industry, and what makes fear palpable is mixing it with market volatility. But the fact remains, markets are volatile and bad markets are common. Making the right decisions during these periods is an important as a physician making the right diagnosis and treatment plan. I stand ready to answer questions and concerns for all those who read this and want to talk.

10 Things You Should Know About Bear Markets (hartfordfunds.com)

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