No Matter How Hard They Try, Humans Can't Control Nature

The market overreacts (again)... How bad is the Omicron variant?... Tune out the daily 'noise' and ensuing market reactions... Dramatic one-day crashes can happen – but they're rare... No matter how hard they try, humans can't control nature...

It seems the stock market might really be full of humans after all...

Think about it...

As humans, we're terrible at predicting how some possible future event will make us feel. And then, when that event actually happens, we often act differently than we expected.

In other words, we let our emotions get the best of us.

Even worse, sometimes our emotions can spiral out of control. When that happens, it can be catastrophic to both your wealth and your health.

If you've ever overreacted (or underreacted, for that matter) to new information in your life, you should be able to understand how the stock market does the same thing... all the time.

That's what happened last Friday as most of us dealt with 'food comas' after eating too much turkey...

My colleague Kim Iskyan shared the pertinent details in yesterday's Digest...

U.S. stock markets on Friday dropped more than 2%, with the Dow Jones Industrial Average suffering its biggest loss of the year. It was a major move during a holiday-shortened trading session that ended at 1 p.m. – during what's normally one of the quietest trading days of the year.

It was anything but relaxed, though, because what drove stock prices down was the emergence of a new coronavirus variant. Dubbed Omicron (the 15th letter of the Greek alphabet), it was labeled a "variant of concern" by the World Health Organization ("WHO").

The WHO's "concern" is that this new variant ‒ first discovered in southern Africa ‒ could be more transmissible, more virulent, and/or less resistant to the vaccine.

For now, we'll just ignore that "The Omicron Variant" sounds like a Steven Spielberg movie based on a Michael Crichton novel. Instead, I (Dan Ferris) will focus on the facts...

COVID-19 has infected less than 3.4% of the global population. And it has killed about 0.0668% of the population, according to data compiled by Johns Hopkins University.

Sure, we're talking about 262 million total cases and roughly 5.2 million deaths. And I'm not trying to minimize things if someone you love has died from COVID-19. But my point is that it's all a matter of perspective... And so far, more than 99% of us have survived COVID-19.

In other words, despite the WHO's "concern" and the endless theatrics we continue to endure, the Omicron variant at this point is simply another version of an illness to which the world has already dramatically overreacted to once... Governments united in the early days of the pandemic to enact unnecessary lockdowns, which just made everything worse.

News of Omicron and the reaction in the stock market on Friday should make everyone ask...

What's really going on?

Though I'm no doctor and don't pretend to be an expert on viruses, the answer to that question seems overwhelmingly to be, "Not much yet. It might not be terrible news. We need more time."

Dr. Angelique Coetzee, chair of the South African Medical Association, discovered the Omicron variant in South Africa on November 18 – less than two weeks ago.

Coetzee noticed seven patients at her clinic with "unusual symptoms" that differed from other COVID-19 variants... For example, in interviews over the weekend, she described one of the patients as a 33-year-old man complaining of extreme fatigue and body aches.

Here's how she described the overall situation to news service Reuters on Sunday...

Most of them are seeing very, very mild symptoms and none of them so far have admitted patients to surgeries. We have been able to treat these patients conservatively at home.

Cases of the Omicron variant were discovered in Israel, too. But officials in that country don't seem to be too concerned at this point, either...

Dr. Sharon Alroy-Preis, the Israeli Health Ministry's chief of public health services, noted that the potential for infection with the Omicron variant is "very high"... But she stressed that vaccinated people who were infected only became slightly ill.

Professor Dror Mevorach is in charge of the coronavirus department at Hadassah University Hospital Ein Kerem in Jerusalem. On Sunday, he told Israeli newspaper Haaretz...

If it continues this way, this might be a relatively mild illness compared to the Delta variant. And paradoxically, if it takes over, it will lead to lower infection rates.

Given my ignorance on the subject, I hope this isn't too controversial to say...

The Omicron variant doesn't seem like a virulent killer based on what folks on the ground in South Africa and Israel have said... It seems like a less harmful version of the same illness we've dealt with since early 2020, which hasn't been that bad for anyone but the old and unhealthy.

I wouldn't bother saying any of this if it were a fringe opinion based on lousy information...

However, the doctor who discovered the Omicron variant called the symptoms "very, very mild." Another couple of doctors in Israel sound equally unperturbed, though they're paying close attention and doing more tests, of course. If things change, I'm sure we'll find out.

And now that drugmaker Moderna's (MRNA) CEO came out earlier today to say that existing vaccines will struggle with the Omicron variant – causing stocks to slide again on more "noise" – we'll also have to wait to find out if he's telling the truth... or if he's just talking his own book.

Moderna's stock traded for less than $20 per share in January 2020. It's around $340 per share today – a 1,600% increase. (And it was up as much as 2,400% earlier this year.)

I promise you that Moderna's CEO has that share price in his mind all day, every day.

My point is, we can't say how the rest of this story will unfold... No one can predict the future, after all.

And frankly, I'm not here today to debate whether the Omicron variant is scarier than any of the others... try to figure out how long COVID-19 will be in our lives... determine if the comments from Moderna's CEO have any meaning at all... or even talk about what happens when they run out of Greek letters for naming all the variants.

One of my main points with this Digest is simply...

Would it surprise anyone if the Omicron variant wound up being a meaningless distraction for investors – like nearly all news stories?

It shouldn't.

For long-term investors, daily news is mostly "noise"... And market reactions to news should mostly be ignored.

The odds are good that the Omicron variant is just more ignorable news that generated yet another meaningless one-day reaction in the grand scheme of things...

A single day's trading is rarely of much consequence. In the long run, a 2.3% drop in a single day is nothing... I know I'm bearish on stocks right now, but the bad times don't last forever.

Remember that stocks – especially U.S. stocks – have been a great bet for the past century or so... And they probably will be for the next century as well. They're great long-term investing tools.

Even if you bought at the top of every previous bubble, you would still be ahead today.

That's the sort of attitude you should have about news and one-day market movements the overwhelming majority of the time... In the long run, it pays to be a stock market optimist.

But I feel like you get enough of that message from a lot of other folks – and certainly from the relentless rise of the market itself these days. So every now and then, it's my duty to point out things that other folks tend not to – like the fact that a single day's trading is usually inconsequential.

But there's always the possibility of a dramatic one-day crash...

I wrote about this idea earlier this year in the Digest – on January 22.

I want to make sure I don't mention it too often, though... That's because large one-day percentage drops in the benchmark S&P 500 Index are rare events. Mentioning this idea too often would make too much "noise."

But I want to make sure this idea shows up in my Digests at least once or twice a year. And since there isn't much of 2021 left, I better get one more mention in before 2022 arrives...

The bad news is that five of the 10 worst days in stock market history happened in the past 34 years – including four since 2008 and two in March 2020. They're not remnants of a distant past... As the initial COVID-19 panic last spring showed, one-day crashes can happen at any time.

The good news is that really awful days are truly rare events... The S&P 500 has fallen 10% or more in a single day only four times since 1928. (The S&P 500 was introduced in 1923, but it wasn't widely recognized until the late 1950s. The historical numbers are usually tracked back to 1928.)

The biggest one-day drop in U.S. stock market history happened on "Black Monday" – October 19, 1987. The S&P 500 fell about 20.5% that day... And the Dow Jones Industrial Average plunged 22.6%.

The second- and fourth-biggest one-day drops in S&P 500 history occurred on consecutive days in 1929 – Monday, October 28, and Tuesday, October 29. (They're also referred to as "Black Monday" and "Black Tuesday.") The index fell more than 12.3% on Monday and around 10.2% on Tuesday.

The Dow Jones Industrial Average fell a total of 23% over the same two days. This drastic two-day decline started the ensuing stock market crash... And it eventually took the market down almost 90% from its 1929 peak to its 1932 bottom.

The third-worst day in S&P 500 history happened last year – March 16, 2020. The index fell 11.98% that day. And of course, that decline happened during the COVID-19-lockdown-induced global stock market crash that took the S&P 500 down 34% in about one month.

For me, it's interesting to look back at what caused each of these big one-day drops.

But I have no illusions about being able to predict such a one-day drop, no matter how much I learn about previous ones...

Sure, I could probably identify similarities between conditions that preceded previous big one-day drops and conditions today. No matter how much research I do, though, I'll never be able to predict such a day with enough accuracy to make it worth betting on.

All I want to do is remind you that such days can happen.

That's a service nobody else will provide for you. Everyone else focuses on how high things can go – and sadly, many folks turn a blind eye to the incredible risks they're taking on.

That makes it look like low-hanging fruit to me.

The fact that I even think such days are worth discussing as a distinct possibility today is a controversial enough topic. So naturally, I feel obliged to ratchet the stakes even higher...

I also did this back in January, when I said it would be a huge surprise to investors if the S&P 500 fell more than 20% in one day. As I wrote in the January 22 Digest...

[T]he biggest surprise of this year – or any other, for that matter – would be if the benchmark S&P 500 Index were to fall more than 20% in a single trading session.

Of course, I also knew the keyboard cowboys would try to tell me that it's impossible with the "circuit breakers" in the stock market these days. More from that Digest...

In short, [circuit breakers are] the market's solution to help stop "panic selling."

The S&P 500 currently has three circuit breakers in place... If the index falls 7% during a session, the circuit breakers halt trading for 15 minutes. Then, the market reopens and trading resumes. If the index falls 13%, a second circuit breaker triggers another 15-minute trading halt. And if the market keeps falling, the exchange closes as soon as it's down 20%.

At the very least, you must concede that an event prohibited by stock exchange rules would be a huge surprise if it actually occurred. It's not allowed to happen... The rules say so.

And as I said back then, I'm not talking about a mere 20.001% drop... Circuit breakers or not, I believe the S&P 500 could fall 25%, 30%, or even 40% in a single day at some point.

The reason is simple... Markets are not manmade machines. That's true no matter how many machines we use to facilitate their operation and try to protect folks from "panic selling."

Instead, markets are more like natural organisms... They aren't created. They happen wherever people are left alone to exchange ideas and trade property freely among themselves.

As I've said before, markets are natural phenomena – and humans can't control nature...

We can only control ourselves. (And we have enough trouble doing that!)

It's a breathtaking bit of hubris to suggest that it's impossible for market prices to fall more than the owners of the stock exchange will allow...

The exchanges don't set the prices... They report the prices set by the market. And the exchange doesn't create the market, either... It facilitates and supports the market.

Here's a big part of the problem... Folks mistakenly believe the market is tangible.

You might think the market is tangible because it involves an old building, a lot of people, and tons of computers. But the market is not any of those tangible things... Instead it's the relationships, agreements, and exchanges between individuals and institutions.

It's not the tangible infrastructure. It's what happens between humans.

That's the market.

Humans don't control that... They operate within it. They can try to game, influence, or exploit it all they want with varying – and likely very inconsistent – degrees of success.

But in the end, humans can't control the market with pinpoint precision in the way that the existence of the circuit breakers suggests. That's what I believe, at least.

We'll see when the next one-day crash occurs. As rare as they are, it's bound to happen eventually. Will the circuit breakers work? No one knows... We can't predict the future.

Regular readers know that I shared the philosophical underpinning of this viewpoint in my November 13, 2020 Digest. The basic idea is what I've already told you here today...

Mankind doesn't control nature.

Am I predicting that a one-day drop of more than 20% will soon occur in the S&P 500?

You'll never catch me making such a prediction... Predictions aren't for me.

Am I saying the stock market is more likely to drop 20% or more in a single day now than at most other times throughout history?

I honestly don't see how anybody could make such a claim.

Then why do I bother?

Because there's always something really important that no one else is telling you at any given time... And I want to figure out what that is and shout it here in the Digest.

It's my duty to you as a Stansberry Research subscriber to do what I would want if our roles were reversed. And if they were, I would want you to make sure that nothing would catch me off guard... That's why I always say to prepare a wide range of potential outcomes.

You might've noticed that I haven't told you what to do about the possibility of a big one-day drop...

That's because, unfortunately, you can't really do much other than to prepare for anything.

Sure, it would help to have plenty of cash on hand... You could buy a lot of attractive stocks at discount prices after a one-day crash. But you would also have to ignore your emotions, which will almost certainly be pleading with you to sell and not buy at a time like that.

Would I recommend stopping out of stocks on such a day?

That's a really hard question... The whole point of trailing stops is to avoid catastrophic losses later by taking small ones early. But what if a big loss arrives all at once?

You would have to make a tough decision. Honoring your stops on speculative stocks and buying more of the truly great businesses in your portfolio seems like it would be smart.

Mostly, though, you would need the fortitude to stick to whatever plans you have in place without getting too emotional – no matter what happens.

It would be just like the market to deliver a sudden, huge blow that causes folks to run for the hills and take big losses... just before it sets off on another epic bull run.

If you're investing for the long haul, it's crucial for you to remember to leave your emotions at the door whenever the next dose of daily "noise" occurs – whether it's another COVID-19 variant or something else that makes headline news on all the financial outlets.

But we're looking too far ahead with all of that.

Today, I just want you to remember every now and then, maybe once or twice a year, that markets might be better understood as natural wonders than manmade machines.

And mankind doesn't control the wonders of nature.

New 52-week highs (as of 11/29/21): Costco Wholesale (COST), Digital Realty Trust (DLR), Intuit (INTU), Lam Research (LRCX), Palo Alto Networks (PANW), Teradyne (TER), Telekomunikasi Indonesia (TLK), Thermo Fisher Scientific (TMO), ProShares Ultra Semiconductors Fund (USD), and Waste Management (WM).

Today's mailbag features feedback on our colleague Kim Iskyan's Monday Digest about a potential "Marshall Plan" for helping the world vaccinate against COVID-19. As you'll see, not everyone agrees. As always, we love to hear your comments – good and bad – at feedback@stansberryresearch.com.

"Inoculating the world population is a great idea. One for the ages. Let's do it." – Paid-up subscriber Marvin B.

"Dear Kim, you're a starry eyed dreamer to think we'd realize an 'unheard-of return on investment' [by helping to vaccinate the world against COVID-19]. Dream on. All the best." – Paid-up subscriber J.P.

"Could you please tell Mr. Iskyan to leave his goals and ambitions of vaccinating the world out of the publications. I became a subscriber for investment information, not for quack medical opinions. Thank you." – Paid-up subscriber David R.

Good investing,

Dan Ferris
Eagle Point, Oregon
November 30, 2021