Cycles and Seasons

Cycles and Seasons

You may be feeling the shift. Summer has faded, the sun is losing some sting, darkness is coming earlier, the kids are back in school, and new routines have settled in. Global stock markets, however, recently reached bright and scorching new highs, leaving the S&P 500’s 23% bear market decline and the spring’s tariff troubles in the dustbin. Did you see it coming?

The current seasonal transition offers a natural moment to pause, reflect, and… prepare? Morgan Housel writes in one of his popular books, “If you know where we’ve been, you realize we have no idea where we’re going.” This is a timeless quote. It is a paradox that humans often use the past to project a bright future, despite the reality that the past has blown up in our faces time and time again. We then stand amongst the wreckage and often proclaim, “of course!” before trying to convince ourselves we always knew it would happen this way.

We must reflect on history  to appreciate that we cannot see into the future, and certainly, not try to make specific predictions.  Historians, like economists, are horrible forecasters. Building your house just above the previous floods’ record high-water marks may not be the best method. After all, the last person who did that after the previous flood just had his house washed away.

Long-surviving investor Howard Marks tells us to understand the economy but not to attempt to predict its fluctuations.  He also reminds us that the power of cycles is “heightened by investors’ inability to remember the past.” His momentum analogy tells us “…whenever the pendulum is near either extreme, it is inevitable that it will move back toward the midpoint sooner or later,” even though the pendulum spends little time in this middle ‘average’ area. Further complicating things, various economic cycles may intersect but do not move in lockstep or affect assets and markets in the same way. Corporate life cycles, fads, fancies, market cycles, and credit cycles move through life, growth, death, and rebirth on their own schedules. Both individual stocks and equity markets overall experience periods of underperformance. It’s called an average because a lot of the performance falls below it.

As investors and humans, we cannot know the future, but we do have to deal with it.  Marks encourages us to know where we are, even if we’re unsure about where we’re going. Trees can grow very tall, but we must not believe they can grow to the sky. The energy for reversion comes from extremes.

The cycles of the changing seasons, luckily, are predictable, inevitable, and often enjoyable. I look forward to backyard fires, fall festivals, simmering crockpots, and leaf piles full of kids. We may not know where we’re going and how it will look, but we know that seasons change and cycles exist. We will continue to urge balance, not boldness, strive for resilience and margins for error in our client portfolios, and caution against overreaction.

Aaron Jeffries