The Dividend Cafe - Corrections, Manias, and the Lessons of History

Episode Date: May 1, 2026

Today's Post - https://bahnsen.co/4w45BZc David Bahnsen discusses why market drawdowns are normal and distinct from bubbles, using 2026 S&P 500 moves (down ~9% peak-to-trough, then a sharp rebound to up ~5% YTD) to argue markets are behaving typically despite war-driven narratives. He distinguishes frequent corrections from rarer bubble bursts and critiques the incoherent swing from “apocalypse” to “mania” framing. Bahnsen outlines three investor responses—market timing (impractical), buy-and-hold (endure), and embracing volatility through dividend growth and reinvestment—emphasizing asset allocation built for investor temperament and cash-flow needs. He applies historical bubble psychology (Kindleberger’s stages) to AI, predicting mixed outcomes: some hyperscalers and AI-related firms will disappoint or fail, while valuable companies may survive valuation resets. Key takeaways include inevitability of future corrections, prudence via diversification and limited AI exposure, and potential selective opportunities after any AI-driven downturn. 00:00 Welcome and Agenda 02:05 Year-to-Date Market Whiplash 04:45 Corrections Are Normal 08:11 Three Ways to Respond 12:20 Embrace Volatility With Dividends 14:10 Manias vs Bubbles 16:12 AI Bubble Risk and Diversification 23:27 Kindleberger Bubble Stages 26:42 Seven Investor Takeaways 29:05 Closing Philosophy and Farewell Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Well, hello and welcome to this week's Dividend Cafe. I'm your host, David Bonson, and we are going to talk today about one of the very most important topics in all of investing. The issue of corrections, bad markets, the issue of manias, excessively good markets, what less than. lessons history has to offer about all of the above. When I say one of the most important lessons in all of investing, I can't think of very many things that an investor who invest long enough in public equities will not face more than the reality of things going poorly and the reality of things going too well and what to do about that and really what to do about either. And I want to set the stage for this a little bit. First of all, let me tell you what we're going

to get into here. We're going to talk about some unprecedented. Okay, I just gave you the key word. Is anything ever unprecedented when we talk about things in market history and I refer to stuff that seems like it's new? Is it actually unprecedented or is there nothing new under the sun? We're going to talk about very precedented moves up and down in the markets year to date where there is a certain incoherence around some of the narratives that have been painted around these. I want to make a distinction for you between two terms that are very, very important. One is that of a drawdown, which is just a period of time, which the market goes down and it is, was at a certain point, and then it draws down to a lower point. That could be 5%, it could be 10%, it could be 20%. But I want to

distinguish that. Drawdown, which is a rather frequent event, from a bubble when a bubble is bursting, which also happens throughout history, but is much less frequent. I want to apply some of these things to the AI conversation, the moment we're in now with AI, where some of the stuff applies, where some of it may not. And then I want to give you a series of investment conclusions that I think will make you a better investor. So let me give you a few numbers just for you to chew on here. On January 28th of this year, the S&P 500 hit 7,002.

in the middle of the day. And it would close at 69.78 that day. So that was basically the same level to close out the day before. Right now, we're sitting at 7,209 in the S&P. So the S&P basically during the Iran war issues of March, it had been early January as high as 7,000 throughout February, before the war, it dropped 1.4%. So it was down going into the war, but not. not that much. But then by mid-March, it hits 6,317. So from that January 28th high to March 30, middle of the day, basically exactly two months later, it was down 9.8%. And that's from its intraday high, from a closing high basis, which is how we're supposed to think about these things from a close to a close. 9.1% was the drawdown, the peak.

to trough. Now we're sitting back up at 7,200, as I mentioned. So you're up about 14% in the 30 days. The S&P is now up over 5% on the year. So all in the course the last couple months, we had a down almost 10% and we've now had an up 15 and we're net 5 on the year. And you go from the market being down a tiny bit, down more during the Iran war, although that uncertainty. We call a 10% drop a correction. In fairness, we did actually hit 10 in both the Dow and the NASDAQ, but the technical drawdown for the S&P did not reach correction vocabulary,

but close enough, I guess. We refer to a bear market as a 20% drop. But I'm not that much interested in the vocabulary here. It's the point I want to make that you've had what felt like for a period of time, a challenging market this year, and you've had what felt like a real violent recovery, and that recovery is all the more pronounced because, by the way, it isn't like the whole war issue is over. Oil prices have gone back to normal, so it's leaving a lot of people wondering why things have

gotten so much better. And most importantly, the historical context coming into this year was three years in a row of above-average market returns. So it is causing a lot of people to wonder where we are. Let's talk for a second about the correction part, the negative, where everyone was freaking out a couple of weeks ago at this point now about a month ago. I'm going to put a chart up on the screen right now. I've put this chart out in Dividendon Cafe before. J.P. Morgan Ascent Management does a quarterly booklet called A Guide to the Markets.

It's a very wonderful little piece. And this is the chart I like most in it. I've been receiving their quarterly booklet for many, many, many years. But this chart, I think, is profoundly important because I want you to pretend right now that there was no Iran war, that there was no spike to above $100 in oil, that we were just simply talking about a month in which the markets went down 9%. And really, it was kind of a two-month period from the high. And it was 9.1 on a closing basis. And you look at this chart up on the screen. And what you see is, again, and it's actually a 14% average drop on any given year, but that's a little skewed by some of those very severe years that were down years. But if you just look at unsevere years that are up years,

the average drop is about 10%. So we did not need Iran. I've made this point before. But what you had was a narrative of a market correction, a sell-off, some type of a major, you know, negative event, to now all of a sudden we're back talking about the other end of the fear spectrum that is this sort of mania. It can't be both. Okay, we can have a conversation about what was happening in March. We can have a conversation about what's happened in April or what was happening in 2023 to 25.

But the idea that we're having both conversations at the same time or right on top of each other, things can't shift that quickly. The reality is, that it's incoherent. And this genuine bipolarity, extreme highs and lows, is impairing people's temperament. And I think it's a problem. This perception of markets that we were in bubble mode in January, but in some sort of an apocalypse in March and back to a bubble mode again in April, doesn't make any sense. It's not a reflection of accurate impressions, but rather human emotion. But to say that things were bad in March, but they're frequently bad, is fair enough. But I want to put another chart up to make a very important point.

Whenever people say a 10% drop makes them feel bad, that's kind of understandable, I suppose, at least for a minute. But when you look at this chart of all of the corrections in the S&P 500, it's 26 of either 5% or more drops that have taken place in the market since March of 2009. Now, what else do we know about the market since March of 2009? It's essentially up over 15% per year for 17 years. And yet what you see on the board are 26 periods where the market was down 5% or more along the way.

And so I don't want to deny that in March, the market went down nine and that many people, were wondering what to do. I don't want to deny that market corrections or drawdowns can feel bad for a moment, but I do want to ask the question what an investor is supposed to do about it. And I want to suggest that there's basically three options. And the first one is one that's very tempting to a lot of people, and I'll just get it out of the way so I don't bury the lead. It is by far the dumbest of the three. And that is that one believes they're going to try to trade around them, that they're going to market time their way, avoiding.

those bad periods and then being back in as things get better. And some of the more humble market timers might say that they may miss a little bit of recovery here and there, but they're pretty good about getting out when they need to, getting back in when they need to and all that type of stuff. I want to be clear, if you do have such a person in your life, a bartender, a Uber driver, a best friend, a coworker, a brother-in-law, or some other intolerable person that you have to spend time with that tells you how much they're in and out of the markets effectively. I have learned five words to use with such people that have 100% of the time ended the conversation for me throughout my adult life. And that is, can I see the confirms? Now, confirms is our parlance in

the business for the trade confirmations. It's a way of basically saying, okay, let me see. because they're not telling the truth. And you say, no, no, no, he really did. And then they will cherry pick a time in which they exited something or entered something. All of that, of course, is entirely feasible. The notion that someone has been able to successfully time their way in and out of all these different corrections is preposterous. It's untrue. Hearing people talk about it is very similar to fishing tales and golf stories.

And you can do with that what you please. I will ask you why they are doing what they're doing if they are such good at doing something that nobody else is doing. They would be a multi-billionaire. So here is the issue that we're dealing with. One psychologically and mathematically could very much like the idea. I can see the allure in saying I'm going to avoid these bad drawdowns because it's true that if every time the market's down 8%, you're not in it. every time it's up eight you are in it, you're going to do really well. The problem with it is not the math. The problem with it is the reality. It simply can't be done. It isn't done. And yet I really

don't argue with people about this anymore because to the extent anyone is quite sure that they can that it really is obvious when markets are about to go down and when it really is obvious when you're about to get a recovery. I do believe, I quote Edmund Burke, not only one of my favorite political philosophers, but America's greatest political philosopher, where he said that example is the school of mankind, and they will learn at no other. I think many people just need to go try it, and very few people touch the stove once they've touched the stove. So drawdowns can be avoided by timing your way around it. That's one thought. Number two is one approach to the chart I had up on the screen before of all these corrections that will come even in a very, very, very strong bull market is that one can just

accept them, a sort of grin and bear it way. What we've traditionally referred to as buy and hold. It's the exact opposite of the first idea. Rather than try to time your way around it, you just ignore it, accept it will happen, and view that as a price you pay for the long-term premier maturen of the market. I think it's been pretty validated over time when you look at it. When you look at these very 26 corrections I put on the board before. It's done quite well. But there's something that is missing from it, which leads me to number three. Number one is to try to time your way around it, which is something I consider to be impossible. Number two is to grin and bear it. That's accepting that it's sort of a negative thing, but that there's nothing you can do about it and you'll

turn out okay on the other side. That's closer. But number three is that you actually embrace it, not bear it, but you cherish it. You yearn for it. You like it because your investment portfolio is benefiting from it. And this is where I believe dividend growth for accumulators is such an offensive strategy that the forced compounding at lower prices off of reinvestment through dividend payments creates an entirely different perspective than just grinning through negative times. you're actually expanding your expected long-term return, and sometimes substantially so, if you get lucky enough with a longer term, drawdown. So within number three, this idea of embracing it, I would say that you also want to have

an asset allocation that is constructed for the temperament of the investor, that meets the cash flow needs that will come, that accounts for principal, needs, if any, that deals with the kind of age and stage considerations that would be out there, but primarily the comfort level. And this is where I think the vast majority investors get in trouble. It's somewhat irrelevant how bad they are at timing their way around the market and how difficult the emotional moments of buy and hold are if the portfolio itself has an allocation that just simply is going to tempt them out of it. And that's, I think, what happens most often. So we want to use asset allocation to mitigate the temptation to do bad things during

inopportune times. And then we want to lean into embrace dividend reinvestment adding to your total return through those bad periods. So let's get back to manias, which are a little bit more fun than drawdowns. Drawdowns are what they are and you have options as to how you want to deal with them. And I think some are bad, some are better, and some are good. But then we're now talking about the opposite end of it, where things are not down too much, but are they just too hot? How do we know when periods have entered at irrational exuberance, as the former Fed Chair Allen Greenspan famously coined it back in the mid-1990s, is this AI moment that we're in right now, a mania headed to a bubble. Bubbles are not drawdowns. Bubbles, as we showed on the screen, excuse me,

corrections, drawdowns, drops in the market are things that happen all the time. They're regular occurrences. A bubble is something that I will grant you could be one of two kinds. One is when a good asset, a useful and valuable thing gets way overpriced. and one is where a not good or not valuable thing gets way overpriced. What you're talking about there is kind of back a napkin, the difference between being down 60 or 70% and being down 90 or 100%. That the NASDAQ in 1999 was filled with things that were money good, that were going to stand the test of time, that were viable companies, that were going to end up having a huge role

in the American economy in the years and decades to come. but they were perversely overpriced, so they corrected before they recovered. There have been plenty of other bubbles that the underlying asset was not recoverable, and that the price level we were talking about was just simply silly. Now, even within the technology sector bubble of 1999, we make a distinction between a Cisco, which was a vital company, and still is today, and a Pets.com, which was a joke and became a basic meme before there were memes. Where are we in this AI story now? How does that fit into it? Are we talking about the risk of a correction when we saw a lot of the names draw down earlier in the year, late last

year, early this year? Was that regular drawdown stuff or are we dealing with bubble stuff? Are we going to bubble? This vocabulary matters. And I think a bubble is something that doesn't recover easily, even if eventually it does, the math of being down 70% is something that is quite substantial. Now, how do you avoid your portfolio being in a bubble? Well, diversification, for one thing, is kind of the obvious answer. If you had 10 to 20% of your money in the NASDAQ in 2000, that wasn't fun to watch that portion draw down, but it wasn't existential. It certainly wasn't fatal. If your whole portfolio was, which it was for many people, it essentially wiped out 15 years of return. If you right now are all in, your entire portfolio or some of the big tech darlings of the AI moment,

I would suggest that's a very different risk than if a portion of the portfolio is. So diversification is just kind of this obvious thing that has to fit in to the conversation. But the problem is a lot of people want to get diversification from an index that is increasingly undiversified or is inversely put increasingly concentrated. But what I would suggest to you right now is that I can make a few predictions about the AI moment. I don't think they're all that helpful if I were making predictions that were really, really bold. They may seem like they're more helpful, but they'd be far more prone to being wrong. but I want to make a couple of statements that I feel comfortable with.

That necessarily means they're a bit less bold, but I think useful to framing the overall concept here. I feel very comfortable predicting, but won't add an arrogant level of specificity, that one or more, one or more of the hyper-scalers that are involved in the AI conversation right now are going to have very subpar returns in the years ahead. head because of misguided capital expenditures. Subpar could be catastrophic, but it also could just

be subpar. It could just be you took a lot of risk and ended up getting very muted returns. That's going to frustrate a lot of people, but that is different than it being totally catastrophic. But the good thing about these hypers is that they're big companies with a lot of cash flows and a lot of brand and a lot of revenue and so forth. But nevertheless, I think some will rationalize their AI CAP-X and some not. Some may see good stock price results and others would lag, but I'm less confident in calling the hyperscalor space a bubble ready to burst. I think, though, the idea that some will end up delivering disappointing results is not an especially controversial prediction. Now, I would also add, as a kind of second thought around the AI

mania bubble question is I feel very comfortable saying that some of these AI labs, all of these are essentially non-public companies right now. Now, that's not true because there are AI labs that are inside hyperscalers. Sometimes they're competing with the labs that they're part of a larger division of a company. So where you know that Microsoft has its component, Google's Gemini and so forth, but that basically we're referring to pre-public names that embody code and deliver AI products, generative AI products. And I think it's very fair to say that one, two of these are going to combust, that something is going to go poorly somewhere in the space. And I don't think that it's particular controversial to say it. Some will end up being as world changing as is predicted.

Now, from there, you get a lot of the AI folks that. could then chime in and make their case for why this LLM is going to beat this one or this one has a better competitive advantage than that one. And that's all well and good, but it is outside of my interest right now. My point is merely to say to investors, I feel that it's likely that there's going to be a really bad story that comes out of this. And I feel it's likely that there will be some good ones. The part I'm not comfortable with is saying who will combust. And even for those that I think might end up succeeding. I'm not comfortable saying what path they'll take to success, because it could very well be choppier or just different in terms of what that road looks like

than people right now are expecting. There's an uncertain future for the pick and shovel companies, too. And I don't merely just mean here the multi-trillion dollar chipmaker and the merely single trillion dollar chip maker that is out there. But once you get past the invidias and broadcoms, I really believe that when you look at the entire space of pick and shovel companies, that there is going to be a very legitimate problem with some of them. Now, I am well aware of the fact that these companies are different than some of the stories from dot com in the 90s because there are real revenues for some, but there are substantially negative earnings for plenty as well. We're talking about a lot more than just chip makers here.

There's a lot of different categories when you start talking about the chip designers and fabricators and data networking plays and data infrastructure companies, the compute providers, the storage providers, et cetera, et cetera. What I will say is I think there's going to be a pile up of dead bodies when all said and done,

even if some of the major brands come out alive on the other side. Now, a lot of that, is because I think the grade of growth could end up slowing down for some. Some of it could be that they don't have great businesses now and it gets worse. But some do have great businesses now and the question becomes more about valuation. But I don't think anything I've said talking about potential concern of AI mania is suggesting apocalypse, is suggesting a worst case prediction. But what I will tell you is that I think things that go down 99% as a group are valueless things that were in a price bubble. And there's a lot of stuff in the eye space that is not valueless. It may be in a price excess,

but there is a different precedent in history than those things that proved to be totally valueless. Many things that have value, but are in a frothy price level, they may go down 50 to 70. but not 99 to 100. And I think it's perfectly fair to think about those two things differently. Where are we? I'm fond of Charles Kindleberger's model. Some of you may be familiar with the kind of five stages of financial bubbles. And I want to go through these very quickly with you before we wrap up. Because I think it can give you an idea of where we might stand in this current moment. The first is displacement, which is a positive term, where a legitimate development comes. and it creates a legitimate opportunity, is displacing something else in the market.

And this legitimate opportunity comes as a result of something new and opportunistic. And that leads to the second stage of euphoria where the expectation of profits creates rising prices. And rising prices seem to be validating the expectation of profits. So you get a kind of feedback loop. And this is similar to what I've written about in the past regarding George Soros' reflexivity theory. But euphoria then leads to a bubble, the third phase. And what happens in stages one and two seems to be so easy. There was displacement and then there's this now kind of euphoria

that then it attracts a lot of dumb capital, people looking for easy capital gains. It's a perfectly human thing to do, but it's speculation trumping fundamentals. No one's really even hiding it. They're in there to kind of trade their way to an easy buck. But then, the fourth phase is distress, where more discerning investors, often some of the earlier ones, early stage investors, start to take their profits, realizing that the exorbitant prices that they're enjoying cannot be justified by whatever the future expectations are. And then the fifth phase is revulsion, where those that were in stage three, the speculators that bought in the bubble upon seeing the people who exited in the distress, then they decide to sell in a panic and a bubble

burst. It's really more of a psychology sequence than it is an economic sequence from displacement to euphoria to a bubble to distress to revulsion. But I will tell you in all humility that it is a lot easier to identify something as a bubble after it is burst than before. Alan Greenspan famously said that, but he said it was impossible. And I disagree. I think that sometimes things look and quack like a duck, and you can call it a duck. What I would say with AI right now is that the entire space could find itself in this model, but I also think it's very possible that it won't, that certain sub-sectors will be fit into this model and others will not. And by the way, even at the AI ecosystem, in some form of totality, we're in this model,

like all of technology was in 2000, I think that there would be a post-revulsion phase where good companies could be bought at reasonable levels and bad companies never come back. And there's a sort of Darwinian reality there that is pretty much what I expect. But the precedents of market history here don't always speak until someone has to go through it. And so that's the way it goes. I'll give you some quick conclusions. If you're hearing all this about manias, about corrections, about where the market is, and you want to know what it means to you as an investor, I'm going to give you seven very quick takeaways, and then I'll call it a day.

Number one, market action in 2026 has not been unusual. It's not been problematic. It's been normal. I love the comedian Chris Rock when a tiger attacked a performer on stage, and he said, everyone's saying that tiger went crazy. That tiger didn't go crazy. that tiger went tiger this market has not been acting crazy this market is doing what markets do periods where it's up periods where it's down a drawdown in the midst of a war is a pretty

reasonable thing to expect and in fact a drawdown of that level is a reasonable thing to expect when you're not in a war number two a broad market correction more severe than the 10% one we just had is not possible it's inevitable it's assured it is going to happen i don't know when I don't know what will catalyze it. Neither do you. Neither does anybody else. But attempts to avoid the inevitability of some further correction will do more damage than merely embracing it will. But number three, dividend growth investors are well positioned for market corrections because they're a, diversified and B, holding higher quality companies and C, set to benefit from downside volatility through dividend reinvestment that exist as a matter of mechanics.

Number four, standard market drawdowns are a good thing. Bubbles bursting or not. In fact, bubbles bursting can be existential for investors in non-diversified portfolios. And number five, the AI moment is hard to identify as a bubble because there are multiple layers and categories within the sector. P predicting that there will be carnage is much easier than predicting that the whole space will decline 70%. Number six, limiting one's exposure, therefore, to A, the higher quality components of the AI story, and B, a limited part of your portfolio is prudent. Number seven, whatever bad does come in the

AI story will very likely end up with investable opportunity on a selective basis on the other side of the bad. My friends, prudent investors know what to do. More importantly, prudent investors know what not to do. And that is the end to which we work at the Bonson Group. We are not going to try to avoid market corrections. We do not believe that they can or should be avoided. In fact, we embrace them and pursue them opportunistically. But we also do not want to be caught into a bubble bursting that does far more damage than a standard fair correction. So we take seriously the stages that investor psychology goes through trying to avoid euphoria that leads to bubbles that then eventually leads to revulsion. We don't want there to ever be anything in the portfolio

creates revulsion. And I believe we have a solution to make that happen. We live in fun times, interesting times, but we do not live in unprecedented times. Thank you for listening. Thank you for watching and thank you for reading the Dividing Cafe. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC member FINRA and SIPC and with Hightower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Advisors LLC. This is not an offer to buy ourselves securities. No investment process is free risk. There's no guarantee that the investment process or investment opportunities referenced

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