Prepare for the Noah Effect
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"In the beginning, God created the heavens and the earth," reads the first sentence of the bible. Later in the book of Genesis, God created cycles.
"Then Joseph said to Pharaoh, ’Both of these dreams have the same meaning. God is telling you what will happen soon. The seven good cows and the seven good heads of grain are seven good years. And the seven thin, sick-looking cows and the seven thin heads of grain mean that there will be seven years of hunger in this area. These seven bad years will come after the seven good years.’" Genesis 41:25-36
Eons later, famed mathematician Benoit Mandelbrot wrote on the similarity between naturally occurring cycles and market cycles. He used the terms “Joseph effect” and “Noah effect” to define the good and bad years, respectively.
Despite their sharp decline last year, equity markets are back to record highs, and the Joseph effect is running strong. But, while investors are enthusiastic, the odds are growing that the Noah effect will come sooner than they think. The math is clear that returns over the next 10 years will pale in comparison to the last.
In this article, I diverge from the math and appreciate the behavioral traits that allow markets to reach extremes. These qualitative factors will help you make sense of today's market and better prepare for tomorrow.