The Fundamentals Are Sound

After a market correction, investors reach for a familiar reassurance: the fundamentals remain sound. But this rests on two unexamined assumptions: that yesterday's price was correct, and that the way other investors think hasn't shifted. Both may be breaking down in ways most investors don't recognize.

• Prices shift around the margins of yesterday's price, which means that stories about market moves become embedded in the next day's starting point. Random narratives, shocks, and fundamentals get baked together without distinction.

• In a game-theory exercise where participants guess 2/3 of the average between 0 and 100, winning answers cluster around 15 to 22, not the mathematically correct zero. This suggests most investors think about what others think, not first principles.

• Central bank communications and always-on media have accelerated a shift toward third-degree thinking: investors now model what everyone knows everyone knows. This shift happened gradually, then became suddenly visible in recent volatility.

• When investors claim the fundamentals are sound after a selloff, they assume how other investors think hasn't changed or will revert quickly. But narratives that shape group decisions persist far longer than individual price corrections.

• If inflation becomes the dominant narrative structuring expectations, the traditional role of bonds as a crisis hedge may not survive the next major drawdown. Few portfolios prepare for that possibility.