"The Psychology of Investment Emotion"
You wake up, turn on the news and see the market is down. Perhaps it’s been down for a few days and you find yourself sad, hopeless, frustrated, doubtful and fearful. Your brain lights up and says “do something about it”. “Take control and make it stop”. “If I just sell, at least the anxiety will go away”. Then another thought comes to mind: “I know what I’m supposed to do… I need to stay the course.. this is what all the “professionals” tell me to do”. But the anxiety is too much and you just want it to stop. For many, left to your own decision making, you are more than likely to login, liquidate your investments and move your money to cash. Ahh.. “I feel so much better”. You’ve done something about it. You’ve controlled what you can. The obsessive thoughts and ruminations have been put to sleep, temporarily. Then, the market starts to recover and move higher.. “Oh no! I’ve gotten out at the wrong time! I need to get back in!”. The new obsessions set in. “Should I get back in? Should I wait? I don’t want to “miss out”. New anxiety has surfaced, just in a different way.
The psychology of investing is not much different than other areas of life. If you’ve experienced some of the thoughts/actions above, not to worry, you’re not alone! I’ve been there myself and I’ve been at this nearly 20 years!
One of the greatest “helps” in navigating market volatility is experience, and, habituation. When we go through Bear markets (20% declines or more) and watch the markets recover, our minds and bodies have formed some immunity for the “next time”. Now, nobody likes the “next time”. One of the challenges each investor faces is to know their own emotional limits. How does checking account balances each day affect your mood? Does anxiety increase as markets turn one way or the other? Do you have thoughts throughout the day pertaining to your investment portfolios? The reality is some react differently than others. Perhaps “not looking”, (or limiting the looks), having a call with me for perspective or directing energy towards other aspects of life would be helpful. You’ve worked hard for your assets and investing ought to be fun, meaningful and productive. The emotional aspect of investing can derail the beauty of long-term investment results.
Since 1928, the S & P 500 has experienced 26 bear markets. All of them have ended as the S & P 500 has returned back to the prior peak it had before. While we have not technically emerged from the 2022 bear market, it appears we are on the way. I am confident history will repeat itself, again. There are certainly some economic headwinds to be aware of, but, economies around the globe seem to be moving along even as higher borrowing costs and persistent inflation remains.
With the prospect of interest rates “peaking”, soon, it’s possible the bond market might be gearing up for some positive returns. The Federal Reserve has been aggressively raising interest rates since March 2022 and have indicated a 2% inflation target is the goal for long-term economic growth and stability. The Consumer Price Index showed a 3% inflation reading in June 2023. So, we’re close to the stated goal of the Fed.
Stocks, bonds & real estate will continue to go up, and, down over various economic cycles. Owning different types of assets over time has proven to be a winning strategy. I continue to stress diversification and see many long-term opportunities in the capital markets at this time.
Stay optimistic & hopeful!
Positive Quote:
“Storms make the oak grow deeper roots.”
- George Herbert
Fun Fact:
Our 10 year old son caught a 5 ½ pound trout this summer!
The Markets
First Quarter through March 31, 2023
Wall Street proved resilient during the second quarter of the year, despite rising inflation, two interest rate hikes, and concerns about the debt ceiling. The economy remained relatively strong, despite predictions that it may be headed toward a recession. The second quarter saw information technology, communication services, and consumer discretionary account for most of the market gains. Energy, utilities, health care, financials, and consumer staples slid lower. The market's positive performance during the second quarter was buoyed by strength in the labor market, economic data that may be showing inflation is beginning to wane, and a better-than-expected first-quarter gross domestic product.
Government bond yields rose in the second quarter, with investors eyeing the relative strength of the economy as reason to remain bullish on stocks. Each of the benchmark indexes listed here climbed higher in the second quarter, with the Nasdaq enjoying its third-best first half on record, a far cry from last year at this time, when the tech-heavy index was going through its second-worst six-month stretch. The S&P 500 also enjoyed notable growth in the second quarter. The dollar inched higher while gold prices retreated in the second quarter. Notwithstanding a roughly 4.0% increase in June, crude oil prices declined for the fourth consecutive quarter, marking the longest losing streak since 1988. While indications seem to point to a more bullish outlook, crude oil supply continued to outpace demand, muting prices. OPEC+ cuts were offset by production increases from other sources, including the United States. In addition, China's demand has been weaker than anticipated, with manufacturing slow to expand. Prices at the pump rose in the second quarter. The June 26 retail price for regular gasoline was $3.571 per gallon, $0.15 above the March price of $3.421 per gallon. However, gas prices are down $1.301 over the last 12 months.
April began the quarter with stocks posting modest gains from the previous month. The large caps of the Dow (2.5%) and the S&P 500 (1.5%) were bolstered by a rally over the last two days of the month. Small caps declined further with the Russell 2000 falling 1.9%, while remaining marginally ahead of its 2022 year-end value. Among the market sectors in April, industrials underperformed, while communication services fared the best. Data in April showed some signs of economic weakening. Job growth in April (236,000), was well below the monthly average for the year, while the number of workers receiving unemployment insurance reached its highest level since November 2021. Housing data was soft, with the number of residential building permits and housing starts sagging from the previous month. Existing home sales dropped, while the median existing-homes sales price was 0.9% less than a year ago. Financials took a hit after another bank fell into Federal Deposit Insurance Corporation receivership. Despite some economic downturns, other data supported ongoing economic strength and bolstered investor sentiment. First-quarter corporate earnings were somewhat better than expected. The Consumer Price Index inched up only 0.1%, bringing the year-over-year increase to 5.0%, the lowest annual pace since May 2021.
Stocks were mixed in May, with information technology and communication services pushing the Nasdaq up nearly 6.0%, while the Dow lost 3.5%. The S&P 500 inched up 0.3%, but the small caps of the Russell 2000 fell 1.1%. Like the previous month, relatively strong corporate earnings reports and encouraging inflation data helped keep investors in the market. Bond prices slid lower, pushing yields higher, with 10-year Treasuries climbing 18.0 basis points in May. Stocks began the month on a downturn after the Federal Reserve hiked interest rate 25.0 basis points, while giving no clear indication as to whether or when more rate hikes were coming. For much of the month, investors focused on the debt ceiling negotiations between President Biden and House Speaker McCarthy. Mega-cap technology and artificial intelligence stocks dominated the market for much of May. Inflation remained elevated, with the personal consumption expenditures price (PCE) index, a preferred inflation indicator of the Federal Reserve, rising 4.3% for the year, while consumer prices excluding food and energy rose 4.7%.
June was a strong month for stocks, with each of the benchmark indexes listed here posting gains of between 4.6% and 8.0%. Inflationary pressures showed signs of cooling, with the 12-month PCE price index coming in at 3.8%. The Consumer Price Index rose 4.0% for the year, the smallest 12-month increase since the comparable period ended March 2021. The Federal Reserve elected not to increase interest rates in June, opting, instead, to step back and assess additional information and its implications for monetary policy. Gross domestic product advanced at a stronger-than-expected 2.0% for the first quarter, showing resilience in the economy. Despite the collapse of several major U.S. banks, the Federal Reserve indicated that the largest domestic banks are sufficiently positioned to continue lending to households and businesses even during a severe recession. The labor market picked up the pace, adding nearly 340,000 new jobs, in line with the average monthly gain over the past 12 months. Industrial production declined minimally, following two consecutive monthly increases. While manufacturing slowed, business activity in the services sector expanded at the fastest rate since April 2022. Long-term bond yields increased in June from May, as bond prices dipped lower.
Eye on the Month Ahead
During the third quarter, investors will likely focus on inflation data and the Federal Reserve's response. Concerns over slowing economic activity, both here and globally, also will influence the market going forward.
Data sources: Contribution provided by Forefield. Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. The U.S. Dollar Index is a geometrically weighted index of the value of the U.S. dollar relative to six foreign currencies. Market indices listed are unmanaged and are not available for direct investment.
I look forward to continuing to guide clients through 2023 and beyond. If you have a friend or family member that you think would benefit from working with me, please don’t hesitate to make the introduction. Thank you for your trust and business.
