I don’t often write about short-term market movements. I find the whole thing exhausting. On most days the market goes up or down some fraction of a percent, which is followed by commentators making up some reason to explain it. We are told the market dropped 0.08% because of “profit taking” and go back to whatever it is that we were doing.

The last few days have been a bit more dramatic. And this is where market movements impact something I do care about – investing. Investing is the process that we all go through to take our savings and grow them to achieve a goal. And it is the consistency and patience we exhibit during that process that is the biggest driver of results. At times like this our emotions make this harder. And that is when we make mistakes which can have a large impact on our outcomes.

Recent Market Activity

A brief overview of what has happened provides a backdrop for the challenges investors are facing. It has been a rough couple days in share markets around the world. We can start with Japan where the Nikkei plunged 12.40% on Monday, the biggest drop since 1987. This followed a fall of 5.8% on Friday. It was just last month that the Nikkei hit a record high. The index is down 25% since.

In Australia the ASX 200 dropped 3.70% on Monday. That followed a rough Friday session as the index has dropped close to 5.5% in the last two trading days.

Much of the turmoil began in the US. First, there are concerns about the commercialisation of AI off the back of earnings from the tech giants. Then there was the jobs report which showed weakening conditions and set off the panic alarm that the US economy was headed for a recession.

The Nasdaq has been hit hardest and entered correction territory with a 10% drop from recent highs. Over $1 trillion US has been shaved off the market caps of the magnificent seven. As I write this early Tuesday morning the US market is down again with the S&P off by around 3.00% and the Nasdaq is down close to 4%.

How Should Investors React?

If you’ve been paying attention to markets over the past week you are probably feeling like you need to do something. This is natural. We humans have an action bias.

At times like this I think it is beneficial to take a step back and try to rationally assess if the facts have changed or if sentiment has changed. And this is where I like to turn to Ben Graham’s personification of investors as “Mr. Market”.

"Ben Graham and Warren Buffett have talked about a charming, seductive manic-depressive gentleman named Mr. Market. Every day he shows up on your doorstep offering to do business with you. When he's manic, he'll offer to buy your stocks or sell you his for absurdly inflated prices. When he's depressed, his prices go ridiculously low. The mistake most people make is answering the door just because Mr. Market knocks. You don't have to let him in. Why should you buy just because he's excited? Why should you sell just because he's down in the dumps? A long-term investor shouldn't care about market prices." — Charles Ellis

There is a reason that Ellis describes Mr. Market as “manic-depressive”. He is diagnosing the market with a disease that involves intense mood swings. And that is what we’ve been seeing the last couple days.

Have the Facts About AI Changed?

Investor worries about AI commercialisation have been mentioned as an explanation for the drop in major tech shares. The trigger has been fears that tech companies are spending too much money on AI and that commercialisation may take longer than thought.

• Meta plans to spend at least $37 billion USD on AI tech infrastructure in 2024.
• Alphabet spent $145 million USD per day on AI infrastructure during Q2.

In the case of Meta and Alphabet, AI is an existential threat. They both need AI to defend their turf. Yet despite this spending, NVIDIA, the main AI hardware provider, is down 20% in the past month.

None of this information is new. The business models haven’t changed. The facts haven’t changed. It’s the sentiment that has.

The Chances of a US Recession

A jobs report showed fewer new jobs and a rising unemployment rate. Investors panicked about a potential recession. This reversed the previous narrative where bad economic news was celebrated for bringing possible rate cuts.

The press is breathlessly reporting that the Sahm Rule has never been wrong — an overstatement. Even Claudia Sahm, the economist behind it, clarified its use:

"The Sahm rule is an empirical regularity. It’s not a proposition; it’s not a law of nature... The star was always the stimulus check, not the indicator that other people named after me.” — Claudia Sahm

This looks like another excuse for Mr. Market to fall into a depressive episode. There is good news on the inflation front, and the Fed may soon cut rates.

Is This a Unique Set of Events?

Are we entering a bear market? Nobody knows. Market predictions are often wrong. Investors who made portfolio changes based on changing economic sentiment over the past few years would have made many short-sighted moves.

For context:

• In 2022, the S&P 500 corrected four times.
• In 2023, there was one correction.
• Since 1980, the S&P has dropped 5–10% 4.5 times per year.

These things happen all the time. And the market explanations often don’t hold up to scrutiny.

What Is the Cost of Emotionally Driven Trading?

Research shows that emotional trading decreases returns by 1.00% to 1.50% annually.

• Friesen and Sapp (2007): 1.50%
• Vanguard (Bennyhoff & Kinniry, 2013): 1.50%

This difference compounds significantly over time. It’s the gap between financial independence and just scraping by.

Final Thoughts

My advice is simple:

• If you don’t have an investment strategy, now is the time to create one.
• If you do, follow it.
• Control what you can: your savings rate, your asset allocation, and your emotional response.

Write down your reasoning before making any major moves. Challenge your assumptions. Don’t let fear dictate your decisions.

Here are some additional resources to help you stay focused on the long-term:

• It is not 2022 all over again
• Want to beat the market? Embrace the power of buy and hold investing.
• How to earn 1.7% more a year than the average investor
• Does timing the market work?
• Active or passive? Neither works for most investors
• My disinterest in investments as an investment specialist
• How to define an investment strategy
• How to set an investment goal