Dorato News - July 2026

Portfolio Issues - Looking Backward

The first history professor who told us that those who forget history are doomed to repeat it seemed so insightful. But we've heard that quote hundreds of times since, and it seems less powerful each time.

The danger is to think history repeats itself, and that you know when it will do so. One of the most popular books right now is one about 1929, by Andrew Ross Sorkin. The author never says that today is looking like 1929, which was the beginning of the Wall Street crash and the Depression, but the implication is there for all who care to think about it.

We like history, and we think knowledge is always a good thing. But we also think you can get stuck in the past. As for 1929, we think the stock market is expensive, and the world order is changing, but the similarities stop there. The financial system isn't the same, the geopolitical factors aren't the same, and the US economy isn't anywhere near the same.

A classic looking-backward mistake, and one we've made before, is to identify a company that's fallen on hard times and assume the company will return to its former glory. Sometimes that happens, and sometimes those companies just continue to disintegrate. The answer depends more on what's happening in the relevant business sector, and who's managing the company.

These next several years, we think, are going to include a number of disruptive changes. We intend to be informed by the past, but set our sights forward.

“Yeah, we're all doomed. But aside from that, how does my future look?”

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Market View - Crazy?

Are investors crazy? A few people have asked us a variation of that question recently. Bad news about inflation and Iran, in particular, would seem to point toward lower stock prices, not higher ones. Yet the US stock market is up this year. What's going on?

In the April newsletter, when stocks had dropped, we pointed out that we thought investors were behaving rationally, as they try to figure out what the future holds. And we think they are doing so again. The key point to remember is that stock prices are ultimately driven by earnings. There's a lot of other noise in the markets, every day. But ultimately, prices are driven by profits. And profits have been beating analysts expectations.

The artificial intelligence (AI) boom is real in the sense that capital spending has ballooned. That capital spending is flowing through the economy and showing up in company profits, even beyond the technology sector. Also, remember that the US continues to run a large annual budget deficit, roughly $2 Trillion, which adds fuel to economic growth.

While the capital spending is real, there is still some question whether the demand for artificial intelligence, from businesses and consumers, will be as robust as the capital spenders think. Count us among the skeptics. We know that past boom times in capital spending did eventually result in products that businesses and consumers would pay for, but that demand often took longer than many expected. So we think we are likely in the middle of a bubble in technology-related spending. That's great for company earnings in the near future, but poses problems farther out. Are investors crazy? We think not. Are they perhaps overly optimistic, particularly in technology. We think so.

So investors aren't crazy, but the stock market can feel crazy at times. You can bet on anything these days, from sports to stocks, and many people seem to be doing so. The fastest-growing part of the options market is zero-day options. These are essentially bets on whether the price of a stock or set of stocks goes up or down in a day. That's not investing; it's gambling. Gambling may be fun, and it may be exciting, but it's not investing. Are these gamblers crazy? Well, only in the sense that gambling seems to us a great way to lose money, and a poor way to make it.

We expect big swings in the stock market to continue. We have investors trying to sort out what the future looks like, we have gamblers tossing money around, and we have investment products that allow people to get in and out of the market at a very low cost. Volatility is likely to be around for a while.

The bond market has seemed relatively tame, at least relative to the swings in the stock market. The ten-year Treasury rate continues to hover around 4.5%. With the US government spending $2 Trillion more than it generates in revenue, we'd expect the ten-year rate to rise. The US Treasury has been issuing more short-term debt rather than long-term debt, so perhaps that explains part of the reason for the steady 10-year rate. But eventually, if these deficits continue, investors will demand a higher interest rate on US debt.

With all the uncertainty in the world it's tempting to think you should dig a hole, bury your money, and put a guard dog on top of it. But that would be pretty crazy. We'll be better off if we stay invested, through the inevitable ups and downs, and let the dog sleep in the house.

Sources: Economist, Wall Street Journal, Value Line, Vanguard, Applied Finance Group, Schwab