For as long as I’ve followed financial markets, the prevailing wisdom has been to think of economic and market cycles in terms of ups and downs—booms and busts, bull and bear markets.
But after listening to Howard Marks on the Sweat Your Assets podcast, I’ve come to see cycles differently. Marks doesn’t view them as mere fluctuations; he sees them as the product of excesses and corrections—a perspective that feels more intuitive and, frankly, more useful.
“Rather than thinking of the cycle in terms of ups and downs, which I always did and most people do, I think it’s better to think of excesses and corrections,” Marks explained. Excesses happen when things go too strong, and corrections occur when things go too weak. This isn’t just a mechanical process driven by numbers and models—it’s deeply human.
“This is not mechanics; this is not physics,” Marks said. “This is an area where people have a very strong impact.” He even referenced legendary physicist Richard Feynman, who once said, “Physics would be much harder if electrons had feelings.” Markets, of course, are entirely made up of people—executives, investors, traders, consumers—all of whom have emotions that drive decisions.
Consider how this plays out in the real economy. When optimism is high, company executives anticipate demand, expand operations, build factories, and hire workers. If too many do this at the same time, we get a period of above-average growth—an upcycle fueled by expansion.
Similarly, positive investor psychology causes stock prices to rise faster than the actual value of companies. Marks pointed out that while companies typically grow in value by 6%, 8%, or 10% per year, stock prices in the 1990s appreciated 20% annually—an unmistakable excess.
But excesses never last forever. Eventually, there are too many factories, too much inventory, and too much optimism. Earnings disappoint, production slows, layoffs begin, and growth falls below average—or even turns negative, triggering a recession.
In the markets, when stock prices rise far beyond a company’s fundamental value, they eventually have to flatten out or decline. That’s when we enter a correction.
This way of thinking clarifies so much about how markets behave. It’s not just about inevitable peaks and troughs—it’s about why those peaks and troughs happen. Human nature pushes markets to excess, and eventually, reality forces a correction.
So when I hear people talk about whether we’re in a bull market or a bear market, I find myself asking a different question: Are we in a period of excess, or are we in the midst of a correction? Because ultimately, as Marks so succinctly put it:
“Bullish periods are followed by bearish periods. It’s the creation of excesses and corrections.”
And that’s what truly drives the cycle.
You can listen to the entire discussion here:
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