10 Useful Phrases to Explain Market Volatility

2. No tree grows to the sky.

Investors have very short memories. They forget that the stock market is cyclical. Bad times fade from their memory when stocks enjoy an extended bull market. People often think this is the “new normal,” and stocks will keep going up in leaps and bounds forever.

Message: “No tree grows to the sky” is a German proverb. The investing connection comes from the logic that companies mature and their growth rate slows. It becomes a bigger company, has many divisions (some doing better than others). overhead expenses increase. The firm might still be growing, but not as fast as the earlier rate.

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3. The stock market goes up like an escalator, down like an elevator.

This should be easy for investors to understand. The rise in the stock market is often gradual, but when the market endures a correction or crash, the losses are often sharp and sudden. Another interesting expression is “Money talks. It says goodbye.” This supports the “declines are sharp and deep” concept.

Message: In a department store, escalators gradually bring you from floor to floor. At the other extreme, a high-speed elevator in a skyscraper can bring you from top to bottom in seconds. Investors have seen the stock market behave in a similar way.

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4. Marry in haste, repent at leisure.

This familiar saying actually dates to 1566. It means it makes sense to get to know someone very well before entering into a long-term relationship.

Message: In the stock market, this equates to buying an investment you do not understand, just because others are doing the same thing. You have a fear of missing out. Instead, you need to understand what circumstances determine whether an investment will work out.

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5. The four most dangerous words on Wall Street are “This time it’s different.”

Although we all know, from mutual fund warnings, that “past performance is no guarantee of future results,” we also know that history tends to repeat itself. Put another way, markets and the economy are cyclical.

Message: We forget how much we worried in the past. History has lots of instances where similar situations have developed and we somehow muddled through to the other side. If you watch TV dramas from the 1970s and 1980s, you see people talking about global unrest, high interest rates, a low growth economy and inflation. Looking back, you see people managed to get through it all.

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6. A lot of long-term returns come from dividend reinvestment.

Investors like that 10% average annual return over time for large capitalization stocks. They might forget that a large component is reinvestment of dividends. Measured by price only, the average return on the S&P 500 from 1928 to 2022 is 5.8% a year. When reinvestment of dividends is included, the return jumps to 9.9%

Message: Reinvesting quarterly dividends is a form of dollar-cost averaging. You are always adding shares, when the stock price is low or high. Many companies increase dividends over time, adding more money back in.

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7. The stock market climbs a wall of worry.

Investors might wonder why, when there is so much global unrest, sticky inflation and higher interest rates, the stock market often continues to go up.

Message: People tend to forget that the stock market is considered a forward-looking indicator, painting a picture of what things might look like in the near future. A bigger hurdle develops when everyone agrees that “all systems are go” and that the stock market has nowhere to go but up. It has been said the worst thing to happen to the stock market is a story with the headline, “Can nothing stop the unstoppable bull market?”

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8. The stock market is like a rubber band.

It can stretch, but it returns to its original shape. This supports the idea that stocks should trade at a certain level based on their price-earnings ratio. The market can dip or soar, taking stock prices with them, but eventually cooler heads prevail and prices move back to where they should be. As long as earnings move higher, stock prices should move upward too, unless the P/E ratio changes.

Message: Everyone has stretched a rubber band or a bungee cord to secure something. Once you release the tension, it goes back to normal size.

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9. What are the alternatives?

An investor might be perplexed because the stock market keeps going up. Assuming that money must always be working, if it was not in the stock market, what else could it be doing?

Message: The stock market comes with risk, but historical returns have been good. When government bonds or certificates of deposit that used to return 2% are now returning up to 5%, these safer alternatives start looking more attractive. Investors might not pull all their money out of the stock market, but they would nail down a safe, fixed return while it was available.

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10. For every seller, there is a buyer.

When the stock market goes down, it is tempting to think that everyone is selling at once. Some investors think that “the smart money is getting out.” It is important to understand that when someone thinks it is time to get out of a stock at a certain price point, there is another investor who thinks at that price point, it is a good idea to buy. OK, there are times when there are few buyers and many sellers and prices keep going down, but eventually prices find the right level.

Message: It has been said there are lots of smart (and well-paid) people on Wall Street. They do not always look at the same set of facts and reach the same conclusion. Put another way, “One man’s trash is another man’s treasure.”

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