It's good to be a skeptic, right? To not be duped. To push back on those Pollyanna views that ignore all that's wrong in this world!
As investors, why do we often have an irresistible tendency to call out some else's positive views as naive? Does it show that we are wise and discerning?
Perhaps the financial media breeds this doubt because controversy sells. The problem is when this noise undermines our ability to achieve our own goals. Looking at the fuller picture, and focusing on what really matters, can help us make better decisions.
INVESTOR BEHAVIOR CAN EASILY BECOME IRRATIONAL
In a world where bad financial news sells ads, good news is sometimes hard for investors to recognize.
When the market is climbing, but fundamentals haven't yet improved, investors hear the market is "ahead of itself". So, caution seems warranted. But, the market is good at incorporating expectations of improvement -- acting on a few green shoots sometimes nine months ahead of time. It is not acting irrationally. It's forecasting.
With market indexes making new highs these days, one hears how "narrow" the market is. Just a few very large stocks are driving the returns while many other stocks are lagging. Guess what? That's what makes a market. In my nearly forty-year career, this has often been the case.
Yes, there are periodic bubbles, like there may be right now. But will it pop or just deflate? This year or next? Will the "Magnificent Seven" decline or just underperform the broader indexes?
No one knows. But this is what makes a market.
There are always some winners, and there are always some losers. In the end, this is just a good argument for being well diversified -- across asset types, company sizes and geographies. It is also an argument for remaining invested. You would always own some of the winners and not have to worry as much if the bubble pops. That bubble would be just one element in your portfolio.
THE "AI AFFECT" LOOMS LARGE OVER THE MARKET
Right now, artificial intelligence has investors excited. And like the internet before it, or the personal computer, or the automobile or even railroads, it will change society.
And also like the internet or those other industries, many of today's highly valued companies will NOT be among the winners. But in each case, large societal change happened that unleashed massive improvements in productivity.
Without getting into the potential negative aspects of AI and our ability to control its trajectory, one can state unequivocallythat productivity improvement is a positive. It is, in fact, the factor that drives living standards higher. When productivity improves, more income is created by the same number of citizens and average incomes rise.
While needing fewer resources (or employees) has always had negative aspects at the individual level, in aggregate, when companies can make more product with less cost, they improve their overall profitability. Investors push those share prices higher. That profitability increase can enable companies to compete more aggressively with incumbents, too, creating a force to pushes overall prices lower.
In short, if AI could raise productivity and profitability while also being a disinflationary force, then today's optimism might not look so indefensible.
BETTER THAN EXPECTED CAN BE GOOD ENOUGH
Sometimes, trends are just better than was earlier expected. That alone can underpin a positive market environment.
Through mid-2025, we have learned that overall tariff levels haven't been as extreme as initially feared. Inflation didn't surge much. Hiring trends have weakened but overall employment remains reasonably high. All are perhaps better than many worst-case expectations.
Most importantly, interest rates are declining. The Fed sees the weakness in labor market trends and is on a rate cutting path. The old saying "Don't fight the Fed" seems to be holding true as expectations of declining rates have helped fuel the market advance for months.
The Fed was not investors' friend when interest rate hikes were needed to quell pandemic-fueled inflation just a few years ago. The Fed’s action derailed the markets as higher borrowing costs rippled through the economy impacting nearly every industry.
Now, the difficulties caused by higher rates are slowly reversing and the market is building this into its assessment of the future. Just as rising rates caused much pain, declining rates are a cure for many ills, and stocks are responding.
FOCUS ON WHAT YOU CAN CONTROL
So, we have a declining interest rate environment. Readings for inflation, economic growth, and employment are generally benign. And we are embarking on a possibly generational change in AI-driven productivity.
Can investors accept this good news, or are we doomed to fret over what comes next? Should we even try to assess it?
In the end, humans are just darned bad at timing the market. Volatility always returns, of course, and bear markets are a fact of life when investing in stocks. But overestimating our own ability to find truth among a disparate mix of factors only sets us back further.
Instead, properly setting an asset allocation that balances our growth needs with our tolerance for volatility allows us to absolve ourselves of the need to know everything. And it gives us a higher chance of success -- because we are not shooting ourselves in the foot.
To paraphrase the Serenity Prayer, we investors are charged with accepting the things we cannot change (or put another way, accepting that we just cannot predict most outcomes.)
We can control our spending, though, and to some degree our savings rate. We can think rationally when volatility resurfaces. We can invest prudently and not chase the hottest tips. We can plan ahead for the future.
Fortunately, we don't even have to be a skeptic to make those things happen.