There’s a peculiar new ritual unfolding in today’s markets. A headline flashes across social feeds — “Stocks fall 2% in a single session!” — and suddenly, investors are rushing in with the enthusiasm usually reserved for Black Friday doorbusters. Commentators cheer. Screens glow green the next morning. And some investors proudly announce: “I bought the dip!” Okay, can we pump the brakes for a minute? If the Black Friday shopping analogy holds, can you imagine fighting (in some cases literally) another shopper to have a chance to buy a device that was selling for $70 but is now marked down to $68.60?
A 2% move in an equity index over one trading day is not a “dip.” It’s not even a stumble. Statistically speaking, it’s a blip — well within one standard deviation of normal market behavior. In a properly diversified portfolio, that’s the kind of fluctuation you expect to see while you’re waiting for your coffee to cool. (Okay, I never actually let my coffee cool — I’m constantly warming it up or brewing a new cup. That, however, is a personal problem… one of many, if you ask those around me. But I digress!) So why did so many investors treat this as an opportunity they just can’t miss?
Behavioral finance offers a compelling explanation. After more than a decade of accommodative monetary policy and shallow drawdowns — or quick rebounds — investors have internalized the idea that any meaningful drop in an index automatically makes it a bargain. It’s a modern version of “buy the rumor”… but will those same investors “sell on fact” as the adage goes?
As Howard Marks of Oaktree has famously written, “Most of the time the market is driven by irrational cycles of fear and greed rather than fundamentals.” When fear recedes and only greed remains, almost any pullback begins to look appealing. Similarly, Jeremy Grantham at GMO has warned that late-cycle euphoria transforms from rational risk-taking into what he dryly labels “delusional enthusiasm.” When markets start rewarding people for reflexively buying after minor wiggles, you’re no longer trading valuations — you’re trading dopamine. And, of course, we can’t forget Alan Greenspan’s 1996 warning about “irrational exuberance.” Well, we can forget, but I think we should not forget. That phrase still lingers for a reason: it’s what happens when prices rise not because of improved fundamentals, but because we assume someone else will buy higher tomorrow. I do want to make one important note that is particularly relevant to today’s market. With the dawn of AI (and all the related impacts), some current valuations that look irrational may just be prescient. But there’s a point at which even the clairvoyant says, “enough is enough” regarding valuations.
When Markets Forget Their Job
Markets are supposed to be price discovery machines. As I learned in business school (and then had reiterated countless times), markets weigh risk, discount future cash flows, and allocate capital. I’m not sure this current bull market was in class for that particular lecture…
A single down day followed by frantic dip-buying doesn’t signal confidence. It signals hyper-sensitivity — a market structure where participants have been conditioned to pounce on any tiny dislocation. Professional investors notice this behavior. As Mohamed El-Erian has pointed out, markets can demonstrate “the illusion of liquidity” — everything works until suddenly it doesn’t. Bounce backs from tiny drawdowns can mask deeper fragilities underneath.
Two percent used to be relatively routine (well, at least not uncommon). For example, in 2008, that kind of move barely earned a headline. In early 2020, we saw multiple down-days of 5–8% in a week. By comparison, a 2% wiggle is like watching someone lose their balance slightly and those watching panicking about a fall. If investors treat every minor fluctuation as a generational buying opportunity, they’re revealing something uncomfortable about today’s positioning — namely, the fear of missing out. Frankly, I could write a Weekly Whiteboard just on the current epidemic of people’s fear of missing out (FOMO) as it pervades almost every stitch of our social fabric. But I’ll save that for another week.
Why This Matters
If we acknowledge — even quietly — that markets are acting irrationally, prudent investors might consider adjusting participation:
Reduce risk exposures
Increase “quality” weighting
Extend ballast through uncorrelated assets (see earlier Weekly Whiteboards)
Sharpen liquidity planning
Revisit return assumptions
To be clear, by no means should this be interpreted as abandoning equities. It means respecting markets when they stop respecting gravity. John Maynard Keynes (a face that would be on the Mount Rushmore of economists) famously warned, “The market can remain irrational longer than those who think it is irrational can stay solvent.” That quote feels very relevant. Today’s markets are shaped by algorithmic reflexes, passive flows, options-driven gamma squeezes, and liquidity conditions that often overshadow traditional fundamentals. Rational valuations can matter less than positioning, and positioning can matter less than narrative. In other words: markets can stay weird longer than fundamentals can remain patient. That’s the rub. Investors see odd behavior and assume gravity will return tomorrow. But history teaches us that sometimes momentum can outrun earnings, sentiment can outrun growth, and liquidity can outrun discipline.
Rational investors suffer most not from being wrong, but from being right too early. After all, “too early” could be a euphemism for… wrong. Keynes was warning us that the market’s irrationality is not a bug in the programming — it’s part of the design. It’s what capitalism looks like when human emotion and cheap liquidity collide. So yes, markets may eventually “realign,” but the timeline is unlikely to match perfectly with our well-defined strategies.
True investment opportunities are rarely identified by color-coding on your investment app. Rather, quality investment opportunities emerge when fundamentals disconnect from price meaningfully — not marginally. Markets are still offering returns. But they can also offer warnings. When investors aggressively buy every microscopic pullback, it could well be a sign sentiment remains overheated. In times like these, thoughtful participation beats heroic enthusiasm. After all: irrational markets may stay irrational — but rational portfolios endure.
Best,
