Well, that happened fast, didn’t it? In April, the amount of pessimism was staggering, with all the talking heads coming out to explain all the things that would likely go wrong. Investors’ outlook plummeted, according to the CNN Fear and Greed Index, falling to low single-digit readings not seen since the COVID crash lows, and even below readings seen during the Great Recession.   

And today, most U.S. equity markets are up well above 15% from those April lows. Whether or not they hold—and to some degree, they won’t in that volatility is an ongoing part of markets—isn't one of the key takeaways in my opinion.  

Rather, I would ask you to consider and embrace that investing requires a) an inherent level of optimism, b) a need to distinguish between insights that are reflective of critical thinking versus those that are just critical, and c) an understanding that using emotions to guide your investments is a large mistake, while acknowledging emotions are a largely unavoidable part of investing.

Let’s explore these concepts a bit more.  

Being critical vs. critical thinking 

Perhaps it’s always been this way, but being critical or overly skeptical seems to be in vogue these days. One reason is that for many, such “reasoning” sounds intelligent, while being more optimistic sounds “naive.” Of course, if one is to use any reasonable time period/length to evaluate markets, they would likely conclude that erring on the side of being optimistic has been far more productive for investors than being overly critical.  

Being critical is nothing more than pointing out faults/troubles, whether real or superficial, while critical thinking is a constructive, systematic approach that focuses on solutions, not just issues.  

The difference, or distinguishing what one is actually engaging in, can be tricky, but trying to keep oneself honest is crucial. This is especially true for investors, but perhaps especially challenging as well. As Arie Kruglanski, Donna Webster, and Linda Richter noted in their oft-cited article, "On Leaping to Conclusions When Feeling Tired: Mental Fatigue Effects on Impressional Primacy," when people are fatigued, or in need of closure/certainty, they are susceptible to falling for critical analysis because it usually offers “takes” that express themselves as definitive judgements with clear-cut answers.   

Of course, one can sound definitive and offer up clear-cut answers and still be wrong.  

In April, pessimism abounded. Intelligent sounding takes expressed or expounded on all that could or was going wrong. And to be fair, there weren’t any definitive reasons or ability to prove they were wrong.  

And yet, the market once again rebounded far quicker than anyone, including us, could have known for sure. However, while certainty is never guaranteed to investors, we did encourage, in our notes from that time, to not give up hope and to take heart from this historical resilience of markets and economies.  

In short, emotions often take far longer to recover from such periods of volatility than the markets themselves do. 

I wrote a commentary, back on Jan. 22, 2016, titled "From Fear to Fear - The Life of Too Many Investors," in which I implored investors to get off the rollercoaster of letting their emotions, or the crowds, dictate their investments. 

Of course, it makes sense that our evolutionary or social programming creates in us an instinct to follow the herd, but when it comes to investing, not only is it usually counterproductive financially, but also to our mental well-being. 

The same crowd, that if you had listened to them just a few weeks ago would have had you convinced to sell everything, has now swung to almost extreme levels of greed. 

Perhaps they are now right, perhaps they are now wrong and that is the point. At best, following sentiment is a coin flip, at worst, as is often the case, it's a great guide as to exactly what not to do with your investments.  

Ever-present challenges 

None of this is to say that one should just shut your brain off and go with the flow. For example, we were cautioning readers and clients repeatedly in the fourth quarter of last year of some very real dangers. But one also always needs to remain humble in their application of their opinions/beliefs and recognize that they may, and often will be, wrong. Correspondingly, any sentiment, logic, beliefs that lead you to extreme allocations/concentrations is dangerous.  

And while tariff talk has subsided for the moment, there are always things that could go wrong. A condition that investors must get over.  

Below are a couple insights from Torsten Slok, chief economist at New York-based Apollo Global Management Inc., on what potential issues markets likely must overcome in the months ahead, as well as the importance of a constructive trade deal with China for the U.S. stock market.

10 downside risks to the U.S. economic outlook:

1. Moody's downgrade increasing borrowing costs for U.S. consumers and firms. 
2. The ongoing negative impact of tariffs on earnings.
3. Trade deal uncertainty for business planning and weak corporate confidence.
4. Extremely high uncertainty and trade war retaliation risk.
5. Consumer spending slowing because of higher prices in stores such as Walmart.
6. Historically weak consumer confidence.
7. Lower tourism.
8. Student loan payments restarting.
9. Housing demand weakening because of higher mortgage rates.
10. DOGE laying off government workers.

Looking at his list, it isn’t about the existence of any of them alone derailing markets, but it's a helpful list to keep in mind as the number of them coming into existence begins to grow in terms of one’s risk allocation—especially if one can reallocate into market strength. 

Regarding the importance of some trade resolutions with China to S&P 500 earnings, Slok had this to say, “Calculations from FactSet’s Geographic Revenue Exposure Database show that China makes up about 7% of total annual revenue in S&P 500 companies. Comparing the magnitude of the trade deficit with the revenue generated by S&P 500 companies in China shows that U.S. companies made $1.2 trillion in revenue selling to Chinese consumers—about four times more than the size of the trade deficit in goods between China and the U.S. 

"The bottom line is that if the U.S. has to decouple completely from China, it would result in a significant decline in earnings for S&P 500 companies no longer selling products to Chinese consumers.” 

In summary, challenges are real and ever present, but so is the world’s resiliency. Being critical can sound smart and/or come off as prudent preparation, but such reasoning usually falls short of well-rounded critical thinking, which usually entails a more balanced sentiment and a measure of humility.  

Process, partners, and a proper understanding of history are key to keep both a well-balanced mindset and portfolio.  

Tim Mitrovich is the CEO of Ten Capital Wealth Advisors LLC, in Spokane.