FROM THE BLOG

September is the worst month for the stock market. Except sometimes it’s not. Stocks and bonds aren’t very correlated. But sometimes they are. Presidential election years are relatively bad for the market. Yet not always.

While these statements are historically “true,” they haven’t been lately—and what’s happening lately is what shows up on our monthly account statement. There’s rarely a shortage of reasons to sit on the sidelines (just read the headlines), avoiding risk while watching others take the plunge. However, history shows that investors generally benefit more from “time in the market” rather than attempting to “time the market.” The latter can lead to long stretches of waiting for the “perfect” moment, which rarely comes. Ironically, this too is a form of risk—just under a different banner.

This year, September proved to be a pretty good month for the market. Stocks and bonds, which were largely uncorrelated for 30 years, have moved together over the past three. And 2024—a presidential election year—saw new market highs rather than a dreaded downturn. Go figure.

As economist John Maynard Keynes famously said: “Markets can remain irrational longer than you can remain solvent.”

Given enough time, both society and markets tend to make rational “sense.” What may seem unfounded or irrational now often proves justified by data a year or two later. If not, markets and society tend to correct themselves. This proclivity to look ahead, and self-correct when needed, is the genius of democracy and free markets.

More “Hold My Beer” Years?
Among the examples of perceived “market irrationality” came in the mid-1990s when then-Federal Reserve Chair Alan Greenspan coined the phrase “irrational exuberance.” He warned of an economy seemingly fueled by excess. For a day, the markets panicked, agreeing with his assessment.

But in a classic “hold my beer” moment, the U.S. stock market doubled over the next three years.

Like elections, markets are democratic systems. Instead of votes, dollars decide outcomes. And much like political elections, where a landslide victory can result from a slight majority, market prices can rise with just a small imbalance of buyers, versus sellers, at a given price. When demand outweighs supply—whether for shares of Apple or apples at a farmer’s market—prices rise.

Looking back, the markets of the mid-1990s weren’t irrational but forward-looking. They anticipated the transformative power of the Internet Age, and voted on much more “excess.” Greenspan, despite his authority and insight, was just one voice in a vast, diverse electorate. As always, markets continue to look ahead today, anticipating tomorrow’s data.

An Aisle Seat for the Ostrich, Please
In a more societal example, we all remember when airlines seemed to become airborne petting zoos. Service dogs were soon joined by therapy rabbits, and eventually emotional support animals of all kinds, culminating in the infamous attempt to board a peacock. The trend only corrected after it stretched far beyond what seemed “rational.”

This is a helpful metaphor for markets. Betting against a rising U.S. market, or trying to accurately foretell a top without a logical organized plan, is akin to predicting how far the boarding policies of airlines might extend.  Who knew “excess” would reach the absurdity of emotional support peacocks before ultimately seeing a correction? Instead, markets—like airlines—can persist in seemingly irrational ways far longer than expected.

When markets rise irrationally, it’s a reminder that outcomes you perceive as irrational are often seen differently by others—or by enough dollars to tip the scales.

This is the genius of both democracy and free markets: they reflect collective decisions, balancing the rational and irrational over time. While individual voices matter, the collective vote—whether cast in dollars or ballots—shapes the outcome.

Later,

Paul Keeton
Managing Director, Investments & Advisory Solutions

Posted by Prospera Financial