Dear Clients and Friends,
Hermann Rorschach, a Swiss psychiatrist, developed a test in 1921 where he gave patients and ambiguous inkblot and asked questions about what the inkblot represented. The answers offered by the patients were used to help define patient’s personality traits and emotional stability. Today you are likely to hear the Rorschach Test as a punchline to a joke or a reference to a cryptic message. However, the investor today is looking at a market that is acting more like a Rorschach Test than they probably realize. Please allow me to unpackage the parallel between our markets today and the century-old Rorschach Test.
Late last year markets around the world were gripped with a fear that all of the issues building in the global economy were suddenly imploding. What the market gave us was a Rorschach Test, and it looked a lot like a crash according to the market pundits. We know that an ambiguous test is open to interpretation, and the prevailing sentiment was negative and that negativity made the inkblot look ominous. Markets tend to go through spats of volatility, but no one could fathom that the volatility they were experiencing was normal.
The Rorschach Test has been described as an ‘inexplicable but effective tool’ for the psychiatric practitioner. Some swear by the results and others are strident skeptics, but over the last 100 years the community has accepted the test as useful in certain settings. I would argue that market corrections and bear markets are much the same, they are both inexplicable and effective. They are inexplicable because they are typically unpredictable and hard to understand when they happen. They are effective because they help the ‘creative destruction’ process and wash out leverage and speculation. But what do we see when we peer into the Market’s Rorschach Test?
The market exists to serve investors. Markets can become emotional, or volatile, and the emotion of the market can overtake participants. The inkblot in a Rorschach Test is completely random in its makeup, but what the patient sees when he peers into the inkblot is not randomness, but something that has meaning. The viewer of an inkblot can see animals, landscapes, faces etc., but those interpretations are just that, interpretations. A market that suddenly sells off can look like a crisis, but when viewed in hindsight will look more like random volatility. What investors need today is to view the random ‘inkblot of volatility’ as an opportunity rather than a moment of doom.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All investing involves risks including loss of principal. No strategy assures success or protects against losses.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.