What Exactly is Normal for the Stock Market?

I recently read an article in the Wall Street Journal that talked about how investors’ hope for 2024 is that the market have a sense of normalcy. The article seems to define market normalcy as stability. This got me thinking…what exactly is normal for the stock market?

Our Desired Definition of ‘Normal’

What is normal for the markets and what we wish were normal are two entirely different things. This is important to define because what we wish for, what we hope for, what we expect, influence our perceptions. And our perceptions drive the decisions we make. When our perceptions are wrong, our likelihood of making a poor decision increases.

Many people may define a normal stock market as one that is stable and predictable. Isn’t that what every investor wants? And yet, if it were stable and predictable, future returns would likely be muted – more in line with global growth than double digit returns. The double digit returns come because of security mispricings, which are often driven by surprises, unmet expectations, and fluctuations in price.

If your clients define a normal market as one characterized by stability and predictability, their perceptions are way off. And that could influence bad decisions or at the least result in a more stressful investment experience.

What is Normal for the Markets

It is completely normal for the markets to fluctuate wildly. How can I say that? Because it always has! Volatility is an inherent feature of stock markets. A normal market means investors may get sea sick if they look too often.

It is completely normal for the markets to be unpredictable. The evidence for this is strong – no one has been able to consistently predict the market with a high degree of accuracy. Surprises happen every year. Prominent bank failures in 2023. A strong equity market despite decades high mortgage rates, bank failures, and persistent inflation also was a surprise in 2023. What will surprise us in 2024? Stay tuned.

It is completely normal that the media will sensationalize and emotionalize every single headline they can. They will make the mundane critical because their profits depend on it. It is normal for the media to care more about clicks than providing accurate or helpful investor information. They aren’t paid for that – they are paid for viewers so it is normal to expect them to do whatever they can to get viewers.

The Role of the Behavioral Advisor

And this is where financial advisors provide their greatest value – in my humble opinion. Financial planning software abounds. Asset allocators are available everywhere. Investors no longer need an advisor to get that done. But they do need an advisor to help them think correctly about the market – have the right filters and proper framework.

We can’t compete against innate biases or the persistent noise of the financial media. But we can help investors learn what to ignore and what to pay attention to. Not only will this increase the probability of reaching their financial goals, but it may very well enhance the overall investor experience.


(c)2024 Behavioral Finance Network