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The Nasdaq is having its best start to a year since the 1980s.
Yet there is an overwhelming sense of dread in the markets.
For instance, I got this message from a Patreon community member this week:
He’s referring to a position I reduced in my portfolio I’ve held since October 2022 called the Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL). This is an ETF that tracks the “yield curve” (which if you’re not familiar with you can read about here).
It’s a position that benefits from disorder in the market. In fact, during the regional bank crisis it was the market’s best performing ETF:
Reducing my position in IVOL and buying stocks meant I’m getting more optimistic about the outlook for both stocks and the US economy.
And that left some people - like Antonio - scratching their heads.
But let me give you some reasons for optimism.
The Allure of “Doomerism”
I’d classify myself as a “cautious optimist” when it comes to investing.
And this optimism used to rub some of my old coworkers the wrong way. I’ll never forget when a former coworker once told me, “It’s easier to sound smart when you’re always bearish.”
Trust me, I understand the appeal of always being bearish after living through the Global Financial Crisis and the COVID-19 Pandemic.
And I understand the allure of seeing what others are missing, to be “ahead of the curve” and making money off it.
But from an investing standpoint, being bearish is a losing investment strategy.
The Recession that Never Was
Let’s go back to Antonio’s comment about how “economic turbulence is coming.”
Sure, there are signs that a recession could happen at some point (i.e. the inverted yield curve).
But most other measures of economic health are flashing green rather than red.
As we talked about last week, falling energy prices, low unemployment, and a Baby Boomer spending boom are currently propelling the US economy.
But even on a relative basis, the US economy is thriving.
Economic Expansion is Coming
Despite what you may be reading in the news, the US is doing very well economically.
That’s especially true on a relative basis. For instance, the US is having the fastest post-pandemic recovery of any G-7 nation:
It’s a similar story on the inflation front. In fact, the US currently has the lowest inflation rate of any G-7 economy:
Let’s do a quick recap of US economic statistics:
Unemployment is at a 50-year low
GDP growing at its fastest pace in the G-7
Inflation is at its lowest level in the G-7
Energy prices are rapidly declining
Consumer spending remains strong (thanks to the Baby Boomers)
This is not a recipe for economic turbulence - it’s a recipe for economic expansion!
But I have a feeling why you may think otherwise.
Monitoring Your “Mental Diet”
There was a popular phrase when I was kid that went, “you are what you eat.”
It means the food you consume affects your overall health and well-being, providing your body with the necessary nutrients and energy to function properly.
I want to introduce a complementary version of this phrase: “you are what you read.”
Just like eating healthy diet means your body will feel good, keeping a healthy mental diet can keep your mind feeling good.
The information and news you consume has a major impact on your thoughts and mental well-being. Just as unhealthy food negatively affects your physical health, consuming negative or biased news can shape your perspective and lead to negative thinking or distorted views of the world.
The comment from my Patreon member is a great example of this. While all major economic indicators are currently positive, why does Antonio still believe “economic turbulence” is around the corner?
Well, that answer is pretty simple…
Your Brain has a Design Flaw
The concept of a “mental diet” is incredibly important because the brain releases dopamine whether the stimuli is positive or negative.
If a person keeps reinforces this mechanism with bad stimuli, they’ll train their brain to seek it more.
Conversely, consuming positive, balanced, and informative news can contribute to a healthier mental state, fostering critical thinking and a more nuanced understanding of the world around us.
And as you can imagine, a healthy mental diet feeds into everything from work, life, and investment decisions.
The Rise of the Algorithms
You need to be very careful with your mental diet.
This concept is more important than ever in the era of algorithmically-driven news.
Twitter, TikTok, and other sources propel stories that intentionally outrage you rather than inform you because - newsflash - that’s what gets engagement.
It’s one reason fake news travels 10-times faster than real news:
But once you are aware of this and improve your mental diet, you will begin to see things in a more measured light. This will then feed into your decision making, particularly when it comes to investments.
Because in the end, the way you make money in the stock market is not by “timing the market” on a bearish call. It’s by buying and holding quality companies over a long period of time and letting those gains compound.
Climbing the Wall of Worry
I’m not trying to say there are never things to worry about.
But “having things to worry about” is the normal state of affairs. It’s what famed investor Peter Lynch called the “Wall of Worry” over 30 years ago in his book One Up on Wall Street:
Back then, it was nuclear annihilation from Russia, high interest rates, and a rising Japan.
Today, it’s nuclear annihilation from Russia, high interest rates, and a rising China!
There will always be things to worry about. Just keep in mind the long-term trajectory for stocks remains up…
…and if you can keep climbing this wall of worry, you too can take advantage of the stock market.
And I’ll be here to help you every step of the way.
Stay safe out there,
Robert