Like everyone, I’m trying to sort things out. What impact will tariffs have? How fast and far will AI grow? Can the stock market keep going up? Are we in a bubble? And is there anything I can do to find my bearings?

I don’t have answers to these questions, but there are some immutable market truths that can be useful in processing what’s going on.

Mind the gap

Markets react immediately to policy announcements and socioeconomic events, but there’s a time lag before the true impact is felt. During this gap, the reporting and analysis can be sloppy, speculative and of questionable value. Commentators and analysts jump to conclusions far too quickly in search of a convenient cause and effect.

It’s not useful to hear that last month’s economic data point was on track, or a company is doing well, when huge changes are ahead. Just because the effect isn’t immediate doesn’t mean it isn’t coming.

When navigating the gap, be prepared for big swings in investor sentiment because there’s no concrete data to restrain it. There will also be plenty of other changes, many of which previously seemed improbable. The longer the lag, the wilder the ride and the greater need to be discriminating in what you believe.

Bull market bluster

Indeed, beware of bold pronouncements from investors riding the market wave. Extended bull markets have a way of making people look (and feel) smarter and as such, risks and rich valuations can be confidently rationalized away.

And it’s common to see causality reversed, as Joe Wiggins points out in his Behavioural Investment blog about gold: “Price moves come first and then the narratives to justify it second.”

Action breeds reaction

We’re all guilty of predicting the future using one or two variables and assuming everything else remains constant. Unfortunately, it doesn’t work that way. If you’re assuming big changes in one area (new technology or products), you need to expect equally meaningful shifts elsewhere (inputs, competition, substitutes, customer preferences). No variable in an economic equation is fixed. For every action, there’s a reaction.

Think exponential

It’s human nature to think of growth and change as being linear, but when it comes to social and technological innovation, you need to push yourself to think exponential. The internet, social media and digital mobility didn’t grow x per cent a year, they grew x per cent a month.

When assessing the impact of AI and tokenization (crypto) for instance, it’s fine to be skeptical, but do it with a mindset of explosive growth and ever-expanding applications.

The market can’t keep going up

Well, it can and will. The pattern is consistent on any stock market chart. Prices rise as time accumulates to the right. What we never know is how large the zigs and zags will be. We only know that they can last longer and go further than ever thought possible.

Which leads me to the question of the day: Are we in a bubble? Are stocks out of touch with economic reality and going to fall precipitously when the bubble bursts?

Stock prices may be ahead of themselves but keep in mind that bubbles are not about numbers and math, they’re psychological. Stock valuations are at the high end of their historical range but that, in itself, doesn’t constitute a bubble.

A bubble is when enthusiasm knows no bounds. Certain stocks or assets are deemed to be great at any price. Confidence and optimism reigns supreme. It’s all about the upside, and the fear of missing out is palpable.

Right now, gold, bitcoin and AI are certainly ticking some of these boxes.

Gravitational forces

Numbers may not be as relevant at this stage of the market cycle but are valuable guideposts when looking further out. Current yields are an accurate indicator of prospective fixed-income returns. Price-to-earnings multiples are good at framing future equity returns. And the amount of capital being spent on production capacity shapes the next profit cycle. A dearth of investment leads to shortages and price shocks in subsequent years (that lag again), and overinvestment has the opposite effect. The boom in data centre spending is being carefully watched right now, as should the bust in condo and rental housing construction.

As you sort through today’s changing landscape, recognize what’s driving asset prices in the short term, but don’t lose track of concrete things that will determine returns over the medium to long term, namely profits, dividends and financial strength.