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It Is Important to Understand Cycles

Sigma Investment Counselors

May 11, 2015

Recently, The Wall Street Journal published an excerpt by John Steinbeck, who wrote about California’s Salinas Valley, where he grew up, in the novel “East of Eden” (1952).

“I have spoken of the rich years when rainfall was plentiful.  But there were dry years too, and then they put terror on the valley.  The water came in a thirty-year cycle.  There would be five or six wet and wonderful years when there might be nineteen to twenty-five inches of rain, and the land would shout with grass.  Then there would come six or seven pretty good years of twelve to sixteen inches of rain.  And then the dry years would come, and sometimes there would be only seven or eight inches of rain.  The land dried up and the grasses headed out miserably a few inches high and great bare scabby places appeared in the valley.  The live oaks got a crusty look and the sagebrush was gray.  The land cracked and the springs dried up and the cattle listlessly nibbled dry twigs.  The farmers and the ranchers would be filled with disgust for the Salinas Valley.  The cows would grow thin and sometimes starve to death.  People would have to haul water in barrels to their farms just for drinking.  Some families would sell out for nearly nothing and move away.  And it never failed that during the dry years the people forgot about the rich years, and during the wet years they lost all memory of the dry years.  It was always that way.”

Cycles are normal and it is important for investors to understand the nature of cycles and how they may affect investment opportunities.  It is human nature to extrapolate the most recent trend, even though that is not the way things work.  The stock market has had a good run over the last several years, but is unlikely to just keep going up.  Some amount of correction is likely, although the timing and extent is uncertain.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA®

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