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Do Your Clients Suffer From Infectious Doomsday Syndrome?

By Dave Gilreath

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In dealing with clients over the years, you may have noticed that some are afflicted with a constellation of symptoms known as infectious doomsday syndrome (IDS). 

Diagnostic symptoms of this disorder — acute economic anxiety, financial neurosis and profound stock market pessimism — stem from overexposure to ubiquitous pessimistic financial forecasts. Victims of this relentless doomsaying are consumed by a sense of futility regarding asset growth, and request that portfolios be overly focused on asset protection. More acute cases are ready for the proverbial mattress.

A common variety of IDS is Granthamnoia, contracted from the doleful economic forecasts of Jeremy Grantham, an investment manager who habitually calls stock market crashes and recessions that usually don’t come to pass. Despite his record, he continues to forecast doom with astonishing certainty. 

Furrowed Brow

With his furrowed brow and grim facial expression, Grantham characteristically opines, when the market is doing fine, that doom is at hand. After correctly predicting twice that a market bubble would soon pop — in 2000 and 2008 — he has since seen more bubbles than a scuba diver on LSD. His abysmal record over the past 15 years makes him a walking contrarian indicator for American markets (despite U.S. global dominance over the last few decades, he vehemently warns against U.S. investment). 

In 2009, Grantham predicted seven lean years for the economy, but in the summer of 2011, he said he’d been too optimistic and that it would be a miracle if annual economic growth reached 2%. He warned clients of GMO, the Boston-based firm where he is chief investment strategist, not to get accustomed to the new bull market and to think “much more conservatively.” In April 2018, he warned of a bubble in the making, and in October 2020, that a bubble would pop in weeks or months.

True to form, in media interviews in the past six weeks or so, Grantham, a Commander of the Order of the British Empire (a rank just below knighthood), has labeled the market’s recovery this year a “head fake” presaging a near-term recession and a stock market collapse.

Dentitus

Another highly infectious strain of IDS is Dentitus, named after Harry S. Dent Jr., a principal of HS Dent Investment Management, a Tampa-based investment firm, and a financial publishing concern.

While the forecaster has made some correct predictions, including Japan’s 1989 bubble burst and recession, the dotcom crash and the populist surge that thrust Donald Trump into the presidency, many of Dent’s prognostications have not panned out.

Dent was an optimist before he was a pessimist. In 1998, he published a book predicting great prosperity for 2000-2010 (“Roaring 2000s: Building Wealth in the Greatest Boom in History”) — on the cusp of the market’s Lost Decade, a period marked by two recessions. 

When optimism didn’t work out so well, Dent published another book, “The Great Depression Ahead,” in January 2009, three months before the market bottomed. In December 2016, when the Dow stood at 20,000, he predicted a rapid 17,000-point decline.

In November 2017, in his book “Zero Hour,” Dent predicted a major market crash during the presidential term of Donald Trump and in March 2021, the biggest market decline ever by June of that year. On Aug. 29, 2022, he warned of an 86% drop in the Dow by the end of 2023. Undiscouraged by market gains this year, Dent in April predicted the crash of a lifetime by mid-June. He now says the crash will come in 2024.

Some victims of Granthamnoia have also developed Dentitus, resulting in acute IDS cases.

How can advisors treat IDS? One regimen that’s proven highly effective is to communicate to clients the fundamental problem with such prognostications, even if true: that they really don’t matter because long-term market averages will deliver the goods to those who stay invested instead of overreacting and liquidating holdings.

At their core, Grantham’s and Dent’s predictions suggest market timing — a pitfall you may have already explained to afflicted clients. (Of course, this needs to be repeated often.)

Cognitive Financial Therapy

Here are some talking points for treating clients afflicted with IDS:

Staying the course is the best way to get to investing destinations. Staying in the market affords exposure to averages, which have been historically upward over the long haul, despite recessions, crashes, bear markets and black swan events like the pandemic.

Stepping to the beat of these dreary drummers would mean taking gains and sitting on the sidelines until you decide get back in. But when? It’s impossible for professionals to reliably make such calls. And being wrong can be quite costly on both ends: missing growth that continues after you bail and missing out by not getting in soon enough to capture upswing; staying invested inoculates against FOMO.

Use the earplugs of reason to block out the noise. Investors who bought the S&P 500 at the market peak in 2007 and remained invested, through 15 turbulent years ending in 2022, got an average annual return of 8.4%.

Sure, the long bull market was good to stock investors, but it followed the 2008 financial crisis and preceded the pandemic-related crash and the 2022 bear market. This 8.4% return has trumped 6.1% from gold, 2.7% from 10-year Treasurys, -.01% for oil, 3.9% for home prices and, as always, 0% minus inflation for the mattress. 

Sure, there’s been some pain, but that’s an inseparable part of investing. This year, we’ve had a recession on Wall Street — in earnings — but not on Main Street, as the powerful American economic engine continues to roll. And, say analysts with proven records, like economist Ed Yardeni, these Wall Street travails are largely over. Companies in various major indexes have broken free of earnings recessions, and earnings are once again headed upward and projected to continue on this trajectory.

The market has picked up this year at a key historical juncture. Returns of the S&P 500 in the third and fourth years of presidential administrations have historically been positive nearly 90% and 83% of the time since 1949, respectively.

This is because the administration in the White House always endeavors to fuel the economy and the market to position for the next election by stimulating the economy as much as possible. Now-trickling disbursements from the Inflation Reduction Act, Infrastructure Act and CHIPS and Science Act are expected to accelerate next year, substantially increasing stimulus.

Letting doomsayers trigger your flight response and pulling out of the market is probably a huge mistake, especially now. We are now arguably in a new bull market. The average bull market since 1942 has lasted 4.4 years, with an average cumulative total return of 155.7%, according to data from First Trust.

The average bear market has lasted only 11.3 months with an average cumulative loss of -31.3%. So, over the long haul, the only sensible course is to get in and stay in. Of course, no one knows how long this bull will run, but the historical likelihood is for multiyear gains. Given his record, Grantham’s pending prediction might be taken as a likely sign of likely bovine vitality at least through 2024. 

Grantham and Dent are reminiscent of Nostradamus, a 15th-century French astrologer/physician/apothecary who gained renown from “Les Prophéties,” hundreds of poetical predictions of plagues, earthquakes, wars, floods and droughts. Yet Nostradamus didn’t put time frames on his predictions, so he could never really be proven wrong. Not so with Grantham and Dent, most of whose assigned time frames for calamities over the last 15 or 20 years have passed with continuing growth.

This kind of reality therapy is essential for effective treatment of IDS. Early detection is critical, so watch for symptoms in client meetings and, if observed, start treatment immediately. 

Dave Sheaff Gilreath, CFP, is a founding principal and CIO of Innovative Portfolios, an institutional money management firm, and Sheaff Brock Investment Advisors. Based in Indianapolis, the firms manage assets of about $1.3 billion.

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