Dear Clients:
Over the last few weeks I’ve received several calls asking essentially the same question:
“Has something changed?”
After the powerful rally that began in early April, many investors have been surprised by the sudden increase in volatility. Technology stocks that seemed unstoppable a few weeks ago are suddenly falling 3%, 5%, or even 10% in a matter of days. Semiconductor stocks have experienced some of their largest one-day declines in years. The highly anticipated SpaceX IPO has already seen significant volatility. Headlines have become increasingly negative.
My answer remains the same.
No, I don’t believe the primary story has changed.
What I believe has changed is that the market is doing what markets have always done after a powerful advance: it is pausing, rotating, and forcing investors to question their convictions.
In fact, history suggests that a period like this should not surprise us at all.
One chart I recently reviewed from Carson Research caught my attention. Looking at market performance throughout the month of June going back to 1950, the weakest part of the month has historically been right where we find ourselves today. The second half of June has often been characterized by softer performance and increased volatility.
Seasonality is never destiny, but it is often a useful reminder that markets move in rhythms. After the extraordinary gains we experienced during April and May, a summer slowdown should not be viewed as unusual. Frankly, it would be unusual if we didn’t get one.
What I find most interesting about the current environment isn’t the volatility itself.
It’s the dramatic shift in investor sentiment.
One of the greatest mistakes investors make is assuming today’s headlines will accurately predict tomorrow’s reality.
History repeatedly shows otherwise.
I was recently looking at several artifacts from prior market cycles.
In the late 1990s, optimism surrounding stocks was almost limitless. Policymakers openly discussed privatizing Social Security. Many believed stock ownership was such a powerful wealth-building tool that retirement systems should be tied directly to the market. Here are a few headlines from that time:
Foreign Affairs, July/August 1997 — “The Case for Privatization” by Martin Feldstein
The Wall Street Journal, Dec. 18, 1996 — “How to Replace Social Security” by Steve Forbes
CBS News, Feb. 18, 1999 — “Clinton’s Social Security Agenda”
Then came the technology bust.
Then came the Financial Crisis.
By 2009, the narrative had completely flipped.
Magazine covers questioned whether the 401(k) system itself would survive. Investors who had once embraced stocks suddenly wanted nothing to do with them. The same people who had enthusiastically promoted stock ownership a decade earlier were questioning whether equities were appropriate retirement vehicles at all.
Here is a Time Magazine cover from October 19, 2009:
The fundamentals did not change nearly as much as the emotions did.
That is an important lesson for today.
The market constantly swings between fear and optimism.
Headlines tend to amplify whichever emotion is dominant at the moment.
Investors who allow those emotions to dictate their decisions often find themselves buying high and selling low.
The reality is that wealth is rarely built by reacting to headlines.
It is built by owning productive assets over long periods of time.
One chart I frequently revisit illustrates this perfectly. Over the last thirty years, one dollar invested in the S&P 500 grew into more than nine dollars after adjusting for inflation. During that same period, the purchasing power of a dollar sitting in cash was cut by more than half.
That chart highlights what I believe is the single greatest long-term risk facing retirees.
It isn’t taxes.
It isn’t elections.
It isn’t market volatility.
It is inflation.
Volatility is uncomfortable, but inflation is permanent.
A 10% correction feels painful. A 50% decline in purchasing power happens quietly over decades.
That is why we continue to believe ownership of great businesses remains one of the most effective ways to preserve and grow wealth over time.
The same principle applies to investors worried that today’s market is somehow “too high.”
Another chart I recently reviewed examined what would have happened if an investor had committed capital at the peak of every major bull market since 1950.
The results were surprising.
Even investors who had terrible timing often achieved respectable long-term returns.
Why?
Because the long-term trajectory of productive businesses has historically been higher.
The lesson is not that valuation doesn’t matter.
The lesson is that time matters more.
One of my favorite examples of this principle comes from Jeff Bezos during the aftermath of the dot-com collapse.
By the time Amazon’s 2000 shareholder letter was written, the stock had fallen more than 80% from its peak. Investors who had once viewed Amazon as the future of commerce suddenly viewed it as one of the great excesses of the technology bubble. Headlines had shifted from euphoria to despair in a remarkably short period of time.
Yet Bezos pointed out something important. While Amazon’s stock price had collapsed, the underlying business had continued to improve. Revenue was growing. Customer counts were growing. Market share was growing. Cash reserves were improving. The business itself was becoming stronger even while investors were aggressively selling the stock.
In that letter, Bezos referenced Benjamin Graham’s famous observation that “in the short run, the market is a voting machine, but in the long run it is a weighing machine.”
That distinction is incredibly important.
In the short run, investors vote with emotion. They vote on headlines. They vote on fear, excitement, geopolitical events, elections, interest rates, and whatever narrative dominates the news cycle that week.
Over longer periods of time, however, the market begins weighing actual business results. Earnings growth matters. Cash flow matters. Competitive advantages matter. Innovation matters.
Amazon became one of the greatest examples in modern market history. Investors who focused on the votes were terrified by the 80% decline. Investors who focused on the weight of the business ultimately witnessed one of the most successful companies ever created. What looked like a disaster in 2000 became one of the greatest wealth creation stories of the next twenty-five years.
That lesson continues to influence how we manage money today.
When markets experience corrections, rotations, or periods of consolidation, our focus is not on the daily voting results. We are far more interested in what the scales will ultimately reveal years from now. We spend our time evaluating whether the businesses we own are becoming more valuable, whether their competitive positions are improving, and whether long-term demand for their products and services remains intact.
The market may vote against an investment for days, weeks, or even months. Eventually, however, the weighing machine tends to win.
That perspective is especially important today as investors navigate volatility surrounding Artificial Intelligence, technology stocks, and the broader market. Daily price movements may be loud, but they are not always informative. Our job is to focus on what is actually being built beneath the surface.
Which brings me to Artificial Intelligence.
I continue to believe investors are underestimating the speed at which AI will be adopted.
A chart from JPMorgan comparing major technological innovations throughout history is particularly revealing.
Electricity required decades to achieve broad adoption.
Telephones required decades.
Automobiles required decades.
The internet dramatically accelerated the process.
Smartphones accelerated it further.
Artificial Intelligence appears likely to move faster than all of them.
That shouldn’t be surprising.
Unlike previous innovations, AI is not being built on top of new infrastructure. It is being layered onto infrastructure that already exists. Billions of people already carry powerful computers in their pockets. Virtually every business already operates digitally.
The runway for adoption is enormous.
When I step back and look at the broader picture, I continue to believe we are much closer to the early innings of this transformation than the final innings.
That brings me to SpaceX.
Many clients have asked why we chose not to participate in the IPO despite my positive view of Elon Musk and the role his companies are playing in the future of AI, communications, energy, robotics, and transportation.
The answer is simple.
I loved the company.
I didn’t love the structure.
Only a small fraction of SpaceX shares were available to investors at the IPO. Scarcity alone can create powerful upward price pressure in the short term. However, the lockup schedule shows a significant amount of additional stock becoming available over the coming quarters and years.
Markets operate on supply and demand.
When supply expands dramatically, prices often struggle.
Could I be wrong?
Absolutely.
But I believed the risk-reward was unfavorable at the offering price.
I continue to believe there will be opportunities to own SpaceX in the future. I simply suspect that patience may prove rewarding.
In the meantime, we continue to spend significant time analyzing Tesla and other AI-related opportunities where we believe future value may not yet be fully appreciated by the market.
As we move deeper into the summer months and closer to the midterm elections, I expect volatility to remain elevated.
I expect scary headlines.
I expect sharp market moves.
I expect investors to be tested.
What I do not expect is for innovation to stop.
I do not expect inflation to disappear.
I do not expect the AI revolution to slow down.
And I do not expect the long-term wealth-building power of owning great businesses to suddenly stop working.
That remains the foundation of our investment philosophy and the reason we continue to stay focused on the long term rather than the next headline.
Sincerely,
Kessler Investment Group, LLC
All information in this presentation is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. All economic performance data is historical and not indicative of future results. The market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. Certain statements contained within are forward looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties. Please consult your adviser for further information.
Opinions shared in this presentation are not intended to provide specific advice and should not be construed as recommendations for any individual. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk.