A woman was recently referred to me from a longtime center of influence. She only had a little money to invest, but wanted a high-level understanding of the market and how it works. As a favor to my COI, I did my best to explain the basics. In the process, it got me thinking about some concepts we all need to keep in mind during unsettling times like these.
The first is that the markets are completely random. In fact, financial economist Eugene Fama won the Nobel Prize in 2013 for documenting market randomness. The markets give us plenty of information, but that information moves so quickly and is incorporated so quickly into prices that it’s impossible to get ahead of it and capitalize on it.
Certainly, smart people can get lucky from time to time. Still, there is no scientific, data-driven methodology for consistently predicting what the market will do next, much less being able to act on it. You (and your clients) may think you can, but research shows you’re just guessing.
Second, let’s get clear about what the market is. Some clients and prospects may even ask you, “What is the market?” Quite simply, the market is an aggregation of corporations with a vast variety of economic factors. Think supermarket in your hometown—eggs, dairy, produce, meat, etc. Various economic factors combine to produce a value based on assets, liabilities and income, called price. Price expresses investors’ aggregate assessment of value at any given point in time.
Stock prices, like all other goods and services in our economy, are determined by supply and demand. Every buyer needs a seller and every seller needs a buyer—otherwise the market won’t work. Human emotion, exacerbated by media headlines, can cause lemming-like panic selling or an unwarranted buying frenzy. But eventually, price and value come back into equilibrium. Over time, stock prices reflect the market value of a given corporation.
Don’t Confuse Price with Value
It’s important to remind clients that price and value are two different things. Price is driven by supply and demand. Value is driven by assets and liabilities. Panic causes people to act irrationally, and they flood the market with buy or sell orders. Prices have fallen because of an increase in the supply of sellers. This drives the price of shares down. Volatility causes prices to fluctuate. But what did this volatility do to value?
Value is generally stable and difficult to quantify. Look what happened in early April after President Donald Trump’s tariff announcement. The Dow Jones index plummeted to 37,000 from over 40,000 in just a few days. But when the 90-day pause in tariffs was instituted a week later, the Dow rebounded back above 40,000. It’s not because the underlying value of the corporations that make up the Dow had suddenly increased. It’s because there were more buyers than sellers during that period. That reduced the supply of stock and drove the price increase. It was the reverse of what happened when the tariffs were initially announced and the supply of stock flooded the market looking for buyers, causing an initial market sell-off.
This leads us to the phenomenon of stock market “bubbles,” which occur when there is an unjustifiable increase in stock prices. Think dotcoms in 1999-2000 and tech in 2023-2025. A bubble is simply proof that price fluctuations are not value changes. Did the intrinsic value of these tech companies (think hard assets, sales, inventory) magically increase because their stock price spiked 400%? No. When stock prices blow up because of speculation, the price collapse is inevitable, and the bubble pops.
Where Does the Money Go When Stock Prices Fall?
Cable news headlines said the “Tariff Crash” of early April wiped out $6 trillion in value. That’s misleading. While it’s true that stock prices deflated by $6 trillion in the aggregate, did the underlying value of these public companies lose $6 trillion? Of course not. Only the stock prices lost value; the companies themselves did not. But that didn’t stop a tidal wave of emotion-driven panic selling. Realizing their error, the lemmings rushed back into the market when the pause in tariffs was announced, and they thought everything was safe. That drove prices back up almost as quickly as they deflated the week before. That is a classic example of price volatility, not value volatility.
This distinction between price and value is very important to convey to clients. Bull markets generally last much longer than bear markets, and their cumulative gains typically outpace the cumulative losses of bear markets.
As most who study this data know, the S&P 500’s historical average annual return is a little over 10.4% (dividends reinvested). But the index has returned exactly 10% in only five of the last 99 years. This points to the volatility in the market. Markets go up and down, but over the long term, markets have consistently trended upward.
Tariffs
Now, let’s talk about tariffs, which are clearly a big driver of market volatility today. What has been lost in all the analysis by the news media and policymakers is that many other factors were weakening our economy before the tariffs were imposed. Inflation, high interest rates, unemployment, declining consumer confidence, budget deficits, inflated money supply and immigration are contributing to market uncertainty, as well.
True, U.S. stocks have been on a great run over the past five years, racking up gains of over 20% in both 2023 and 2024. But that lofty performance was largely driven by a handful of mega-cap tech stocks. The so-called Magnificent 7 (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla) accounted for over half of the S&P 500’s total performance in 2023 and 2024
Also, the over-inflated money supply has kept excess dollars in circulation, and that has propped up the market, too. As those dollars recede, there will be less money available to provide liquidity in the market. I believe a flight to safety will move money into Treasurys and other safe, low-yielding bonds and government securities. This typically dampens market volatility and causes a reduction in the gross domestic product. I expect it will take the balance of the year to work out these dysfunctions, maybe longer.
One last thing to consider about tariffs. There has been considerable conversation about the trade deficit and the need to bring manufacturing back to the United States. The U.S. represents about 25% of world consumption. So, it makes sense that we import more than we export, especially since so much of our manufacturing has gone to countries with low-cost labor. Having a trade deficit of zero would mean the world economy had slowed down tremendously because the U.S. stopped buying from other countries. A zero-trade deficit is impossible unless the world goes into an extended recession/depression. No one wants that to happen.
So, what should you tell your clients during this time of uncertainty and recalibration? My advice is simple: if they are in the market, they should stay in the market. If they are in cash, then they should stay in cash equivalents until the markets and economy return to equilibrium. How do we know when this has happened? You can’t know except in retrospect. Any other answer is guessing.
Remember, markets are random. Emotions are hard to manage during times of great economic chaos. This is why your clients need rules to follow. Rules that are time-tested and reliable. This is why market timing is so dangerous. Any way, you cut it, trying to predict when it’s safe to get in (and out) of the market is a gamble. It is far better to stay invested and ride it out unless there are mitigating circumstances to do otherwise.
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