This is a tale of two different environments occurring over a short period of time.
SPECULATIVE MARKETS THRIVE ON EMOTION
Last week, and continuing today, the US stock market is finally taking a breather after a steady series of new highs. Investor optimism was near an all-time high, too. (If there is a better contrary indicator, I don't know of it.) In short, humans are pretty bad at timing their purchases in the stock market.
"Spontaneous optimism", as famed economist John Maynard Keynes wrote in 1936, "can only be taken as a result of animal spirits – of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities."
In other words, we humans are irrational, acting on emotion rather than analysis. We chase trends due to the fear of missing out. Our "animal spirits" get the best of us. Speculation is portrayed as investing, be it the DotCom craze, the latest crypto invention, or an AI stock that will change the world. The cycle repeats itself.
So, last week we started peeling off some profits, redeploying these funds to international shares whose markets have lagged the US for nearly a decade. Lofty valuations are not the place from which one typically compounds wealth at high rates.
I have spent a full career missing great trends and suffering from FOMO. Call this bias a result of early training as a "value investor" who attempted to determine an investment's intrinsic value before investing. (Crazy, I know.) So, I admit that I still can't see the logic behind crypto. But sometimes it's okay act more like Warren Buffett and stick with what you might actually understand.
Sometimes, it is risky to live and invest at the cutting edge: Crypto sent reeling by world’s biggest ever heist - Investment News
INVESTORS DETEST UNCERTAINTY
The investor community is also deciding that chaos and unclear policies from Washington undermine confidence -- business owner, executive, and consumer. Uncertainty is what kills market valuations, and if investors need to include an uncertainty premium for investing in US companies, then we all will be worse off.
When a consumer is unsure of their job security, they delay big purchases. When business owners are unsure of the operating environment, they delay hiring, expanding operations or investing in their business. Investors start to go to the sidelines until trends become clearer.
This level of uncertainty is self-inflicted and largely unnecessary. There is no rush to restructure the government in 30 days. A sensible downsizing could be done as most companies do -- directing managers to decide which workers are low performers and where two positions might be structured into one role. Firing the employees who are still in a probationary period was low hanging fruit for someone who doesn't want to do the hard work of actually managing. And frankly, nothing is less financially logical than firing an IRS worker since it is proven that they more than pay for themselves.
So, here we are: Optimism leading to high valuations made those levels hard to sustain unless news continued to be positive. And now, investors are tempering their enthusiasm as things became less predictable. A correction is long overdue (since they usually happen about annually.) So, hang on tight because the ride has started to get bumpy.