Streaking Market

If you are not into baseball analogies, be forewarned this is going to be one of those pieces. If the whole, “baseball is like life because…” spiel reminds you of Brussels Sprouts, deviled eggs, or jello salad, just stop reading right now, because it might get a bit nauseating.

So, here it goes…I’ll start by saying that to enjoy investing it helps to enjoy baseball, or at least understand the nature of the game. Which, by the way, may explain why the decline in popularity of one has seemed to coincide with the decline in popularity of the other. What you say? Aren’t more and more young people getting involved in investing? Isn’t its popularity rising? While the news media is all a flutter with young people getting interested in investing, I push back on that. The “Reddit Army” Gamestop crowd, or the Bitcoin crowd, or the Dogecoin traders chasing this bubble’s Beanie Baby craze is as similar to investing as baseball is to basketball. Sure, both are sports, but in every other way they are diametrically opposed. For every slam dunk that basketball offers you, baseball offers you a step off the rubber or a mound visit from the catcher. One is slow and laborious, the other is entertainment for the amphetamine addicts. I am not a basketball fan. To me baseball is like the Sopranos and basketball is like Dynasty. In basketball, there’s no there, there as Gertrude Stein would say.

I’ll admit baseball makes it hard to love. Did you know that last month, something like only 16% of the pitches thrown ended up with the batter putting the ball in play. Sixteen percent?!? That means that 84% of the time fans essentially watched two people playing catch. Talk about watching paint dry. Baseball needs a renaissance, like it got in ’98 with the homerun battle between McGwire and Sosa, to get fans engaged again. Which brings me to my point. Today’s markets are giving investors a “home run” chase. What is typically a slow, plodding process of return generation has turned into a race higher for nearly all markets. Investors who normally never/rarely check their statements are logging in daily to see what their account did. Even for the non-Reddit crowd, investing is getting exciting. It is getting fun. But it won’t last.

Baseball and investing are two sports played out over an extremely long time horizon. They are games of averages, which temporarily experience extreme outliers, but eventually find a way to revert back to the mean. A team may win 20 games in a row, but no team is going to win every game. Those 20 wins are eventually going to be 20 wins borrowed from future games played. The stock market may go up 58% from March 2020 to present, but those gains will eventually be borrowed from the future. On a month over month basis the stock market has been up 10 out of 13 months since last March. In baseball terms that means the S&P 500 is hitting .769. Since 1985, the S&P 500’s batting average is .660. Since 2009, the S&P is batting .700. All of this means, that eventually there will be longer stretches of poor returns which will lead to the market back to its longer-term batting average.

Aberrations from the mean do not necessarily imply a sudden reversion. Aberrations can continue longer than anyone expects. Joe Dimaggio hit in 56 games consecutively, so the market can certainly continue its trajectory for a good deal longer. However, the longer it goes the further it has to decline to return to its average. Eventually, I suspect, like the ’98 homerun race, the curtain will be pulled back on all the Quantitative Easing policies and inflation spurring fiscal policies to reveal a market and economy on steroids. After all, an economy with a 2% real growth rate probably shouldn’t be experiencing 15% inflation adjusted returns on an annual basis without some sort of performance-enhancing stimulant. Eventually, stimulant-induced effects lead to crashes and hangovers. When this will occur is still anyone’s guess, but that doesn’t mean we can’t enjoy it while it lasts.

Thanks for reading,

Zach and Dave

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