Do Your Clients Suffer From Infectious Doomsday Syndrome?

At their core, Grantham’s and Dent’s predictions suggest market timing — a pitfall you may have already explained to afflicted clients. (Of course, this needs to be repeated often.)

Cognitive Financial Therapy

Here are some talking points for treating clients afflicted with IDS:

Staying the course is the best way to get to investing destinations. Staying in the market affords exposure to averages, which have been historically upward over the long haul, despite recessions, crashes, bear markets and black swan events like the pandemic.

Stepping to the beat of these dreary drummers would mean taking gains and sitting on the sidelines until you decide get back in. But when? It’s impossible for professionals to reliably make such calls. And being wrong can be quite costly on both ends: missing growth that continues after you bail and missing out by not getting in soon enough to capture upswing; staying invested inoculates against FOMO.

Use the earplugs of reason to block out the noise. Investors who bought the S&P 500 at the market peak in 2007 and remained invested, through 15 turbulent years ending in 2022, got an average annual return of 8.4%.

Sure, the long bull market was good to stock investors, but it followed the 2008 financial crisis and preceded the pandemic-related crash and the 2022 bear market. This 8.4% return has trumped 6.1% from gold, 2.7% from 10-year Treasurys, -.01% for oil, 3.9% for home prices and, as always, 0% minus inflation for the mattress. 

Sure, there’s been some pain, but that’s an inseparable part of investing. This year, we’ve had a recession on Wall Street — in earnings — but not on Main Street, as the powerful American economic engine continues to roll. And, say analysts with proven records, like economist Ed Yardeni, these Wall Street travails are largely over. Companies in various major indexes have broken free of earnings recessions, and earnings are once again headed upward and projected to continue on this trajectory.

The market has picked up this year at a key historical juncture. Returns of the S&P 500 in the third and fourth years of presidential administrations have historically been positive nearly 90% and 83% of the time since 1949, respectively.

This is because the administration in the White House always endeavors to fuel the economy and the market to position for the next election by stimulating the economy as much as possible. Now-trickling disbursements from the Inflation Reduction Act, Infrastructure Act and CHIPS and Science Act are expected to accelerate next year, substantially increasing stimulus.

Letting doomsayers trigger your flight response and pulling out of the market is probably a huge mistake, especially now. We are now arguably in a new bull market. The average bull market since 1942 has lasted 4.4 years, with an average cumulative total return of 155.7%, according to data from First Trust.

The average bear market has lasted only 11.3 months with an average cumulative loss of -31.3%. So, over the long haul, the only sensible course is to get in and stay in. Of course, no one knows how long this bull will run, but the historical likelihood is for multiyear gains. Given his record, Grantham’s pending prediction might be taken as a likely sign of likely bovine vitality at least through 2024. 

Grantham and Dent are reminiscent of Nostradamus, a 15th-century French astrologer/physician/apothecary who gained renown from “Les Prophéties,” hundreds of poetical predictions of plagues, earthquakes, wars, floods and droughts. Yet Nostradamus didn’t put time frames on his predictions, so he could never really be proven wrong. Not so with Grantham and Dent, most of whose assigned time frames for calamities over the last 15 or 20 years have passed with continuing growth.

This kind of reality therapy is essential for effective treatment of IDS. Early detection is critical, so watch for symptoms in client meetings and, if observed, start treatment immediately. 

Dave Sheaff Gilreath, CFP, is a founding principal and CIO of Innovative Portfolios, an institutional money management firm, and Sheaff Brock Investment Advisors. Based in Indianapolis, the firms manage assets of about $1.3 billion.