Break out the Valium: Mr. Market has gone off his meds again
Benjamin Graham famously compared the stock market to an imaginary individual investor, and named him “Mr. Market,” whose defining trait is mood swings.
Mr. Market’s highs were most vividly manifested from the March 2020 bottom of the pandemic crash to the autumn of 2021. His low kicked in around Thanksgiving of last year. He might reach a sort of bottom—if only for a moment—as I type this, with many indicators showing pessimism not seen since the Global Financial Crisis.
(Then again, I wrote this email Wednesday afternoon, and when the sun came up Thursday, so did the values of almost every major U.S. equity index.)
Mr. Market’s most recent panic attack was sparked by the failure of a poorly managed bank out in California called (you just can’t make this stuff up) Silicon Valley Bank. Financial reporters can hardly contain their enthusiasm, after all, the news cycle was starting to become a bore:
When will inflation come down? Will there be a recession? How high will interest rates go? Will the market make new lows before this tightening cycle abates?
Pundits have been asking these same unanswerable questions for a year. Financial journalism’s limitless capacity to recycle them remains a phenomenon.
Enter the spark these journalists have been waiting for: Silicon Valley Bank, which was a crisis of confidence and herd behavior more than anything else.
It is not so much one’s faith that’s being tested these days, as it is one’s patience. We must never forget Warren Buffett’s dictum that “the stock market is a device for transferring money from the impatient to the patient.”
Silicon Valley Bank is a reminder for us all to pause for a moment, and take a deep breath. It’s been a heck of a few years in the markets and the world. The extreme economic and financial distortions coming out of the pandemic are still working themselves out. Those advances were fueled by fiscal and monetary stimulus used to offset the economic devastation of the pandemic.
And it came with a catch. The Federal Reserve created too much money, left it out for too long, we got inflation, and now the Fed is trying to fix it by raising interest rates. Tinkering, in any form, has an inevitable ripple effect throughout the market.
The market is recalibrating after an extraordinary chapter in world history, and it probably will be returning to form for a while. When and how it will do it—the day-to-day developments of which no doubt make great empty calorie fodder for CNBC—are far less important than that they are doing so.
What is next? The equity market will go down as long and as deeply as it needs to; only a fool would try to call a bottom. When it does come (if it hasn’t already), the recovery will arrive as quickly and sharply as the original drop, just as history tells us it always does.
In the meantime, to paraphrase Rahm Emanuel: never let a market sell-off go to waste. Use this time to fund your IRA, 401k, 529 education savings. If you take one lesson away from the Silicon Valley Bank meltdown, make it this: resist the herd. Don’t be Mr. Market.
Technology has allowed Karen and I to enjoy sunny Florida this winter—I’ve been working from my home office in Boynton Beach on Tuesdays and Thursdays. But I am home in New Jersey for a few days and see the daffodils peeking out of the ground in Florham Park.
Thus, the cycle of life begins anew. Be of good cheer.
Happy spring,
John Bodnar, CFP®, CIMA®
PS: I have attached Warren Buffett’s annual shareholder letter in this printable PDF version. It is another masterpiece. Read it, enjoy it, and share it with someone you love.