The emotional nature of markets.

March 14, 2025

To get right to the crux of the matter, let's go over some ways to process financial news and anxiety when every illuminated surface now seems to have a stock ticker.

The first thing to remember is that as an investor, you are not buying a super-charged CD. Markets do not go up in straight lines and also have returns better than something like a savings account. There is no financial system in history that has offered that (though lots of salespeople have!), as the return would be high and the risk low. Historically you have gotten better results over years and decades by accepting volatility. (If you want the equivalent of a CD but not super-charged, we can do that, but your after-tax result will approximate inflation. So you're not really making any money.)

Today the S&P 500 is back to where it was in September. And this is a critical point: Assuming equivalent corporate earnings, as equity markets decline, they get safer. They do not get riskier as they go down, they get riskier as they go up. Because equity markets rise when the news is good, you are paying more money per unit of corporate earnings, and while this feels good, it is quietly riskier.

The problem is that human beings are not wired for this. Emotion drives decisions. For example, only in a few periods since 1987 has economic bearishness polled as high as it is today:

Source: The American Association of Individual Investors Sentiment Survey as of 3/6/2025.

Note that bearish spike points historically have coincided with some solid buying opportunities: early '90s, the '08-'09 financial crisis, December 2018, Covid, and 2022.

On the contrary, in mid-2021, which was a banner investing year, a poll came out that people expected 17.3% returns above inflation, a near-mathematical impossibility! But the human brain maps recent events forward in time. What happened next? 2022, which was one of the worst investing years in four decades.

The takeaway point: media-driven emotion has no predictive ability and will not help you as an investor.

Our clients generally own indexes, and in the stock indexes, those are real businesses under the hood. While the price of those businesses varies, it almost never matches the real value. The price can be too high, and it can be too low. The beauty of the market is that it just takes the average point of hundreds of millions of daily investor opinions on this question. Over time the price will be close to the value, but not exact.

Modern markets are intensely democratic machines (1). No one can control them; they are pure voting systems. Unlike many other areas, you don't have to be in a position of power or brand to make a lot of money swimming against the tide. If you think you are right and everyone else is wrong and you are in fact right, you will make a lot of money. And the numerical earnings of businesses will be the judge, so you will get a fair grader.

As a firm, One Day In July is structured from the bottom up to mitigate emotional impact of news on the investor. This would be a difficult structure for competitors to copy, as it has taken a long time to implement, and it is designed deeply into the firm. But we see the news media and the emotions it creates as one of the biggest risks for the investor, and we are paid to remove risk that doesn't add return.

Though I can't do this for work due to my job, on a personal level I have started to look for ways to hedge off news risk. I found this engineer, building a dot-matrix printer that prints out the headlines once a day, like an old AP news terminal.

"But you must watch something!" you say. All right, all right, I'll give you a little peek.

1. First, rail car loadings. These are looking healthy.

2. S&P 500 dividends have been rising.

3. U.S. Treasury bond issuances. On Wednesday the U.S. government sold $39.7 billion in a standard auction. The bid-to-cover ratio was 2.69, which means there were 2.69 offers for each bond sold. This is above 2024's average of 2.53. There is still strong demand for U.S. debt in the immediate term.

Dan Cunningham

1. I say "modern markets" because early markets weren't so fair. Andrew Carnegie and Cornelius Vanderbilt, among others, made arguably the majority of their money through what today would be illegal insider trades.