One of the real thrills when I was growing up was waking to find a yard full of fluffy snow and then listening to the radio to hear if my school was closed. A snow day meant we got to go sledding, build snow forts and essentially enjoy a free winter day to its maximum potential. Icy bliss it was, and I think a principle reason was because it was unexpected.
While snow days seem to happen much more frequently today, that delightful element of surprise is much rarer. Now snowstorms are modeled and announced as much as a week in advance. And while one can debate the accuracy of specific timing and depth projections, the overall ability of weather forecasters to predict such storms has improved significantly over time. This may be better for the common good, but it has also made our children’s lives just a little less surprising.
This year The Weather Channel decided to name winter storms in much the same way they do hurricanes. Those storms are named because it makes them easier to communicate with the public. Defining them by name helps reduce confusion when multiple storms are brewing at the same time. Historically, winter storms were not named and notable ones are referred to as a “famous” or “great” winter storm or blizzard of a particular year.
The fact that we name snowstorms now got me thinking: what if we called Bear or Bull markets by specific names? Tropical depressions start out with a number. Then they get a name as they develop into tropical storms. Using this as a standard, what if we decided that every 5–10 percent pullback would get a sequential number? Then, when the pullback exceeded 10%, it would be upgraded to a named correction. A 20% pullback would become a named bear market.
Better yet, what if the media treated such phenomena the way they treat developing storms? As a pullback developed, there would be more consistent reporting and commentary. It would raise investor interest and – by explaining what was fueling the development – hopefully increase general understanding of the nature of the markets.
Ironically, while naming storms can increase awareness, it can also generate more noise. Noise leads to confusion and can result in panic or trivialization. Naming a pullback might turn it into a self-fulfilling bear market. That’s because economics is a science, but not in the same way physics or chemistry is a science. Matter and energy behave in pretty predictable ways under certain conditions. Humans can but often don’t, particularly in crowds. Just look at the way the first snow of winter or a good heavy rain impacts local traffic.
Your Baird Financial Advisor is here to help you sort through all the name calling and panic driving and provide you with the news you can use. Much like our parents, who weren’t always thrilled to learn we’d be home from school on a snow day, most investors would agree that having some perspective on what lies ahead is essential to planning for it. And wouldn’t you rather be sledding or skating through the next named market correction than standing outside in the cold because someone dropped you off without knowing a storm might be coming?