Market Fancies and Fortunes

by

Last year, I ventured a prediction – a mere 10% correction in the S&P 500 (^GSPC +0.47%). A trifle conservative, as it turned out, for the market plumbed depths closer to 20% in April, stirred by President Trump’s tariff announcements. One might say it flirted with a bear market, a decidedly unromantic prospect. Of course, such dramas are rarely prolonged; a temporary easing of tariffs, and the market, ever the optimist, rebounded with indecent haste, ultimately finishing the year some 16% higher. A curious paradox, wouldn’t you agree? To witness such volatility, and then to be rewarded for ignoring it.

My initial thesis – that elevated valuations breed fragility – proved sound. The market, like a delicate porcelain doll, requires only the slightest provocation to shatter. It wasn’t the steepness of the fall that surprised me, but the sheer predictability of it. One suspects the market, much like society, rewards the audacious, but punishes the merely foolish.

The current market, alas, remains perched precariously atop a tower of optimism. Investors, with the fickleness of fashion, are abandoning the glitter of artificial intelligence for the understated charm of small-cap stocks. A diverting spectacle, but hardly a sign of enduring strength. It is my considered opinion – and one rarely errs in considering – that another 10% correction is not merely probable, but inevitable. The market, after all, is not governed by logic, but by sentiment, and sentiment, as any connoisseur of human nature knows, is a notoriously unreliable guide.

The Illusion of Resilience

Let us not mistake frequent corrections for a robust constitution. A patient may survive numerous minor ailments, yet succumb to a single, well-aimed affliction. Guggenheim, in a report some years ago, observed that since 1946, the market has endured some 84 declines of between 5% and 10%, recovering, on average, within a month. Larger declines, of 10% to 20%, require approximately four months to heal. The market, it seems, is becoming increasingly adept at self-preservation, but this agility merely postpones the inevitable reckoning.

What will trigger this correction? A question for the soothsayers, perhaps. I suspect some unforeseen event, some dark horse galloping from the shadows. However, should I be pressed for a wager, I would place it on either resurgent inflation or a crisis within the AI sector. The former, a persistent annoyance, continues to gnaw at consumer savings. The latter, a gilded bubble, threatens to burst with spectacular consequences.

Trump’s tariffs, while partially mitigated, may yet exert their influence on consumer prices. And while investors have cooled their ardor for AI stocks, we have yet to witness a truly catastrophic event – a dot-com-style implosion – that might bring the sector to its senses. The financing within this space is, shall we say, circular – OpenAI and Nvidia funding their vendors and customers, a delicate dance on the edge of a precipice.

A correction, naturally, does not preclude a positive year-end result. The market has demonstrated a remarkable capacity for recovery, even in the face of adversity. But investors would be wise to acknowledge the potential for turbulence. To believe otherwise is to mistake a fleeting respite for enduring calm. The market, like life, is a series of illusions, punctuated by moments of harsh reality.

Read More

2026-01-27 19:04