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EARLIER THIS SPRING, Emil Verner, an economist at MIT, made an observation: The stock market, he said, seemed to be exhibiting “excess tranquility.” Despite an ongoing war, inflation and other negative headlines, investors seemed surprisingly unfazed. The market was on track for its fourth year in a row of positive returns. Through May, it had gained 11%.
But no sooner did Verner make this observation that the market did begin to wobble. Last Friday, the Nasdaq index dropped more than 4%, and several individual stocks sank more than 10%.
How can we make sense of this—that, despite the headlines, the market was so resilient for so many months, but then reversed course so suddenly? Looking at this question can help us better understand the nature of the stock market and why its movements often seem so illogical.
We can start by looking at the period prior to last Friday’s decline. Despite the ongoing war and resulting inflation, the market had risen steadily throughout April and May. Why? Three factors likely contributed.
First, and probably most importantly: While the war with Iran caused gasoline prices to jump, the impact on the overall economy has been more muted than most people expected. Despite the negative impact on commodity prices and interest rates, corporate America has been doing well. Among companies that reported earnings in the first quarter of this year, 85% beat expectations. For reference, over the past 10 years, approximately 76% of companies typically beat estimates. So corporate earnings are growing, and they’re growing even faster than expected.
Another factor that might have contributed to the market tranquility: More investors are participating in workplace retirement plans like 401(k)s. Because these plans make regular investments via payroll deductions, they serve as a sort of thumb on the scale, constantly buying, whether the market is up or it’s down. This has been a steady, multi-year trend.
The third factor contributing to market tranquility: artificial intelligence. Yes, there are concerns about it, but so far, these seem mostly theoretical. Most notably, there’s been the worry that AI systems would replace jobs and cause widespread unemployment. Last year, Sam Altman, the chief executive of OpenAI, warned that “a lot of jobs will go away.” At least one company blamed AI in initiating a round of layoffs, reinforcing Altman’s warning.
More recently, though, Altman has backtracked. In an interview in May, he acknowledged that he was “pretty wrong.” “I’m delighted to be wrong about this,” he said. “I thought there would have been more impact on entry-level white-collar jobs being eliminated by now than has actually happened.”
The data seems in line with Altman’s updated view. A year or two ago, it was easier to dismiss the early versions of ChatGPT for their tendency to fabricate information, but sentiment has shifted. Instead of putting white-collar workers out of jobs, AI seems instead to be helping them be more productive. Lawyers use it to help with research, programmers use it to write code, marketers use it to create websites and finance people use it to build spreadsheets. The list goes on, and because of all that, I suspect, investors have a generally optimistic outlook on the economy. Many people view AI as being in the early innings, with far greater productivity gains in front of us.
But then came last Friday, when the market began to sputter. Why the sudden shift?
The proximate cause was a strong employment report released on Friday morning. The economy added 172,000 jobs in May, more than double what economists had expected. And the numbers for March and April were both revised upward.
This was all good news. The problem for the stock market, though, is that investors tend to think a few steps ahead, and that can turn good news into bad news. The worry in this case is that a strong employment picture will result in inflationary pressures, because more workers will have more money to spend. Taken together with the already elevated inflation resulting from oil prices, the fear is that the Federal Reserve might be forced to raise interest rates this year, after dropping them several times last year. Reflecting this worry, interest rates rose last Friday to 16-month highs. And because stocks tend to fall when rates rise, stocks dropped.
And thus, with just one press release, market sentiment soured.
Benjamin Graham famously stated: “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” From day to day, in other words, stock prices tend to be driven by sentiment, stories and emotion. But over the longer term, logic generally prevails, and stock prices will more rationally reflect companies’ profit levels.
I agree with Graham’s description of the market. What I would add, though, is that the stock market is also like a pinball machine. It isn’t so much that investors are irrational. Instead, the reality is that there’s simply too much news out there for even the most reasonable person to process at any given time. So people respond to whatever happens to catch their attention or whatever they see as most important. That differs from individual to individual and can also change from day to day. The result is the seemingly erratic ups and downs that we’ve being seeing recently, and that we see so often.
This is another reason why I think the best approach for investors is to never react too strongly to the day’s news and instead to take the long view. History has shown that this is when Graham’s weighing machine should ultimately carry the day.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
As always Adam, solid advice. I especially agree with the observation that there is too much news out there on a daily basis such that people react based on what item crossed their radar. Media publications and Cable talking heads always trying to explain daily market action. Cant be done accurately or consistently. Bogel was right in preaching, Stay the Course.
Adam – Always an informative article. Thank you for being one of the people carrying on Jonathan’s legacy.
Adam, keep these great articles coming. I am a long term investor, even at 80 years old. 85% equities and 15% cash works for my family. I watch day to day, and just smile.
Maybe the market has been stable because it has become an excessive storage of wealth and the owners of the wealth don’t have any reason to withdraw it for use now. When they want to use the wealth for something else, then there will be trouble, because the stock market overall is priced higher than there is cash to cover the sales if people want out.
Regarding the jobs report, the new jobs are mostly not good jobs. Wages keep dropping in relation to the value of the dollar and what the very wealthy are accumulating.
You said, “When they want to use the wealth for something else…”.
Demography is going to influence that “something else”. The baby boom bubble is continuing to age into the RMD era of their lives. Many will not be able to afford to, or will not, reinvest that money. We boomers break everything we touch. I doubt the stock market will be an exception.
My wife and I fit your description as we are taking our RMDs (which requires liquidating mutual funds) and spending most of the proceeds for living expenses. Our heirs will inherit the remaining mutual fund balances when we pass away, so those funds might remain invested in stock/bonds. It would interesting to know what the estimate is of how much of Boomer wealth IS invested in equities that WILL be liquidated over the next 30 years to fund retirements. Will it be large enough to negatively affect (suppress) stock prices over that period of time??
Your comment “Our heirs will inherit the remaining mutual fund balances when we pass away” got me thinking about my conversion from mutual funds to their ETFs class earlier in 2026.
I also wonder if the recent 1 trillion dollar record valuation level of the S&P 500 ETF (VOO) at Vanguard was caused in part by many baby boomers converting their mutual funds to their ETF class, especially if you know your beneficiary already has a similar type account at a different brokerage firm.
While inherited mutual fund shares in a taxable account can typically be transferred directly to the beneficiary’s own similar type brokerage account at the same brokerage firm it may be easier for a beneficiary if the original owner does a conversion of a mutual fund to its ETF class during the original owner’s life to avoid forcing the beneficiary from having to sell the inherited mutual funds to transfer inherited assets.
Vanguard, like most brokerage firms, has a useful guide for beneficiaries that has matters the original owner(s) may want to consider during life when thinking about the nuts and bolts of transfers that will occur when they are no longer alive.
Thanks for a cool-headed look below the surface of the recent market activity, and the similar perspective on AI. I have several very excitable folks in my circle of acquaintances whose emotions change with the daily headlines. I once had the habit of pointing out that the goal of the media they consumed was to generate the very feelings they had, to keep them coming back for more. But my advice was not as exciting as the headlines!