Markets Are… Rational?

Given the headlines of late, most people—without even checking the stock market—would assume it’s been extremely volatile and trending downward… or even “crashing,” to use a catchy phrase. But quite the opposite is occurring, at least for now. The U.S. stock market (S&P 500) is just a couple of percentage points away from all-time highs, international stocks continue to push higher, and the bond market appears to be digesting inflation concerns without overreacting. 

“The stock market can remain irrational longer than you can stay solvent.” – John Maynard Keynes 

Sometimes in the short term, it’s hard to pinpoint exactly why markets underreact (or overreact). It often feels like an irrational, inappropriate response. But the market doesn’t care about our emotions! In our minds, it can seem wrong, but the market can remain irrational longer than we can “wait out” the moment until things feel calm or rational.  

But I’m here to tell you… It’s not that irrational. 

What has happened in the Middle East is tragic. The last thing the world seems to need right now is more conflict. Thankfully, as of today (June 24), it appears that we may be closer to a resolution than to escalation. Let’s hope negotiations are successful, and the world can move forward. Still, many clients have asked: Why hasn’t the market reacted more sharply to these headlines? 

Oil prices did jump—for good reason—but the overall stock market response was mild. Here’s why: 

Financial markets react by quickly assigning probabilities to possible outcomes. Think of a bell curve (here’s a quick stats class refresher). The center of the curve—0—is the most likely outcome, or the mean. As you move left or right, the probability of those outcomes decreases. In market terms, the left tail represents negative or catastrophic outcomes, and the right tail represents overly optimistic ones. Here’s a picture for reference: 

In response to a crisis, markets immediately reassess the odds of extreme events (like a global war), and initially, they may price in some fear. However, as more data and headlines arrive, the market updates its expectations. When evidence suggests the worst-case scenario is unlikely, that “left tail” risk gets priced out, bringing markets back in line with more moderate expectations. 

This happens constantly in markets—whether it’s about geopolitical risk, inflation, corporate earnings, or the broader economy. That’s why the market’s moves don’t always match how we feel. The market will assign probabilities faster than we can contain our emotions. If we invested based on emotions, most of us would never feel comfortable investing at all. Some might even want to hide their money under the mattress! 

Dealing with These Emotions 

That’s why having an investment plan is critical. Your portfolio should align with your risk tolerance. More importantly, it should match your time horizon. When do you expect to need that money? 

Mental accounting—matching specific dollars to future spending goals—can be a powerful tool. Think about retirement income planning: You’re not withdrawing your entire nest egg on day one. If you retire at 60, you could easily have a 30-year time horizon—longer if you’re lucky! That means a significant portion of your portfolio should likely stay invested in stocks. What matters most is how you position and account for the funds you’ll need in the next 5 years. 

For example, if you expect to draw $50,000 per year from a $1 million portfolio, the $250,000 you’ll need sooner should be invested more conservatively, while the remaining funds—earmarked for the next 25+ years—can remain growth-focused. 

This helps you mentally separate short-term needs from long-term goals and make better investment decisions. That accounting allows you to let the long-term portion of your portfolio ride the wave of volatility with less anxiety. 

This approach applies to other financial goals too - buying a home, saving for college, or planning a big family trip. 

Once you step back and acknowledge that you can’t control the headlines—but you can control your reaction and how your portfolio is structured—it can take some of the stress out of investing. 

I’ll leave you with this: Investors are often compelled to “do something” in response to major events. But doing nothing isn’t underreacting—it’s often the smartest course of action. Those who have a solid plan understand that reacting emotionally tends to lead to poor outcomes. What may seem like an irrational market is often just the market efficiently assigning probabilities to what comes next. 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.