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An Investment Cycle has to Cycle

An Investment Cycle has to Cycle

November 05, 2020

An Investment Cycle has to Cycle . . .

I had recently sat in on a conference call, where we discussed the current status of the COVID pandemic, and during the presentation, something caught my ears, and triggered my inspiration for this month’s commentary – the presenter said “Viruses gotta virus”. He was referring to the difficulties we face in subduing this terrible virus. Simply put, no amount of lockdowns or quarantines are going to be able to stop a virus from being a virus.

I immediately wondered about investors and the many challenges they’ve faced in 2020. When the annals of history are written about this dumpster fire of a year, they are likely to find that this year was yet another year in the cycle of investing.

No matter why the market swings have happened this year, it’s still part of the investment cycle. The investment cycle is nothing but another Groundhog Day. The investment cycle is made up of the same three components: Euphoria/Panic/Regret and Repeat. Just step away from the emotions tidal wave that has overcome you this year, and look at the investment cycle, and you’ll find:


You’ll remember that, as late as mid-February, the U.S. economy was cruising along at record low levels of unemployment, the broad equity market – which I define as the S&P 500 Index – was regularly making new all-time highs. Where on February 19th the S&P 500 reached a new all-time closing high on 3,386.15. Investors were feeling confident and comfortable, after seeing the S&P 500 Index close up more than 31% the previous calendar year. If investors ever wanted to experience euphoria, mid-February was it.


And then it happened – Lockdowns! Where the economy essentially came to a screeching halt. Where the scientific community struck fear and panic into everyone by showing us their models predicting a tidal wave of deaths that was going to hit us. The lockdowns led to the fastest major equity market meltdown in history. In 33 days, from February 19th to March 23rd, the S&P 500 Index dropped by a jaw dropping 34%. The VIX, which is investors’ most watched “fear gauge” – made new all-time highs. The drop was so fast, that investors didn’t have time to panic. If they’d been given another four weeks and another 10% down, chances are even the stoutest of patient long-term investors would have been wiping the beads of sweat from their nervous brows. Panic has a feel, and the speed and veracity of the decline never gave a chance for investors to reconcile that fear into action. Unlike what happened in 2008-2009, where the drop was larger, and longer (S&P 500 dropped some 50+% in a little over 17 months). Investors took action by jumping off the cliff and selling their investments, simply because they had time to manifest their fears into action.


Even the most bullish of investors (and financial advisors like me) had no idea what was in store for investors on March 23, 2020. It was the day of capitulation. The equity markets certainly didn’t announce to the world that it had just capitulated, and was about to go on an upward tear, the likes that have never been seen in history (see the recording breaking fall referenced in the paragraph on panic). Of course, looking back it makes complete sense. The equity markets were once again, acting like they always do in the cycle – a rubber band. The rubber band is a simple machine: The farther you pullback on the rubber band the farther it goes upon release, and the equity markets were stretched very thin from the record breaking drop from Feb. to March.

Of course, it also helped that earlier in the day on March 23rd the Federal Reserve took the historic step of announcing that there would be no dollar limit on its willingness and ability to support the economy through the credit function. Hence the mad dash of activity after the announcement (here comes the part of regret):

The equity markets were once again, acting like they always do in the cycle – a rubber band.

  • Almost to the hour of that announcement, the equity markets sharply reversed course, reeling off its best 50 days of all time and its best 100 days since 1933.

  • That the economy, by many important measures including personal income, and retail sales, recovered more broadly than ever imagined during the height of the panic. Even today it still continues to do so.

  • That the equity markets recovered BEFORE the economy is merely par for the course; that is well documented throughout history as being a leading indicator of what’s about to transpire with the economy.

  • The quest to find, and distribute a vaccine at a record pace; history will see this as the current generation’s Manhattan Project on a global scale.

Can you imagine the pain of regret experienced by that poor soul who bought into the panic and sold at the absolute worst time?

The lessons of the investment cycle are ever prevalent in today’s headlines, and throughout history have been proven time and time again that:

  1. The equity markets can never be timed.

  2. The declines of this size, if not speed, are as common as dirt.

  3. You never know what will trigger and end to the crises. Equity markets will continue to go down until they don’t anymore.

  4. Equities remain the only way most of us are ever going to achieve our long-term goals.

  5. Optimism remains the only realism.

In the end “Investment cycles gotta cycle”. Thanks for reading!

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