https://www.bnnbloomberg.ca/u-s-stocks-roar-as-powell-quells-fear-of-jumbo-hikes-1.1760681
There
is a concept in behavioral economics called loss aversion. It refers to the situation
that a real or potential loss is perceived either psychologically or
emotionally as being more severe than an equivalent or equal gain. We feel more
deeply for a loss than a gain or the loss of $100 is far greater than the joy
of gaining $100. For greater insight into this concept check out Nassim Talab’s
book, Fooled by Randomness. I recommend it for this and many other
things. This applied to today’s comments on several levels.
I have
included several articles on the recent happenings in the markets and with
various statements by banking and governmental officials which need to be read
in order listed to show the progression of thoughts and ideas in the last two
weeks. I had a discussion earlier this week with someone who wanted to know
what they should be investing in. They didn’t think I had given a very
satisfactory answer when I suggested they shouldn’t be doing any investing. I
would go so far as to suggest that looking at financial news with the intent of
investing should not be done right now. Don’t look or follow or even think
about financial news, at least not if you are looking for information to help
you choose investments or trying out some strategy suggested by a financial advisor
or even well meaning friend. Because the only thing that will happen is you will
feel rotten or worse, hopeless. Any investment decision you make right now will
result in some loss, possibly a lot of loss and remember, loses contain more
negative punch than comparable gains. Granted, your current investments may be
taking a hit but then you are not following my initial counsel to avoid looking
at financial news with the intent to invest. Think back to the first paragraph
about loss aversion. Right now the market is so all over the place any gains
(feeling some little good) will be massively offset by losses (feeling much more
bad). The articles I have included / listed show how in just a couple of weeks
we have gone from despair to euphoria to despair (not quite that extreme but you
get the point).
The
first article from Deutsche Bank (April 26, 2022) suggests we will definitely have
a recession in 2023 and that the Fed monetary policy needs to be very aggressive,
i.e. really jumping the Fed Funds rate up a lot and often. The second article from
Bloomberg dated May 3, 2022 suggests investors are too Bearish. “Investors have
become so negative about the stock market that Wall Street [read smart money]
is starting [to] think a rally may be on the way.” They give several technical
metrics to support their thinking. The Third article from BNN Bloomberg (May 4,
2022) states Yellen thinks the Fed can make a “soft landing” for the economy. Again,
a couple of reasons are listed. We have a very negative article (recession next
year) followed by 2 very positive articles (market likely going up and no
recession next year).
The
last two articles show what actually happened. The BNN Bloomberg article is
from May 4, 2022 the day of the Fed meeting and the AP article is from May 5,
2022 the day after the Fed meeting. The May 4th article is after the
meeting and gives the reaction of markets during the next few hours. Markets are
up 3%, joy and jubilation. Several reasons are given including that Chairman
Powell says that .75% Fed Funds Rate increases are off the table. All is roses
and smells great (an emotional gain). The next day the markets falls 3% (an
emotional loss). How could this happen, the fiscal doves had taken over, the
world was roses, champagne had been flowing. The talking heads had spoken. We
are told in the AP News article that “yesterday’s sharp rally was not rooted in
reality and today’s dramatic selloff is a reversal of that misplaced exuberance”.
Exactly what does that mean. So, yesterday pundits couldn’t read the signs but
today they can? What about tomorrow’s swings, for there certainly will be
swings. Will those signs be read correctly? What will be the greater insight
and understanding that will allow for reasoned understanding and the ability to
plot the market and world economies, especially on a day to day basis. Now do
you see why you should not be reading the financial news thinking about
investing. The financial noise is so loud individuals can’t hear, let alone
think in any kind of reasonable manner. There is little real information in the
noise that would allow for reasoned decisions. The financial pundits will never
apologize for, attempt to correct nor take any responsibility for any misconception,
error or misleading statements . You will find contradictions among the nuggets
of truth and accurate information. It is the nature of financial noise because remember,
in the markets, information is power and financial noise may contain useful
information and….. may not. How do you tell (it is extremely difficult).
What
should you be doing at this point or any point in which you need to make financial
decisions. Think of the tortoise and the hare or slow and steady. Limit your debt
to necessities like education, housing (don’t ever consider variable rate
financing – too many potential problems) and transportation. Have a diversified
portfolio of stocks, bonds, mutual funds. Remember, stocks are usually a longer
term investment with the expectation that they will go up and down, mainly up over the longer term. Bonds tend to be a bit more stable and many times move opposite
stocks (but not always) and mutual funds, to get more diversity from smaller
investments. A mix is good. Look at rebalancing your investments on a regular
basis, a good financial advisor can help.
Hang in there. These are unhealthy times for those that immerse themselves in the dirty waters of too much financial noise (news). Watch from the sidelines. Keep to the regular and steady investing schedules you have established before and don’t think you can time or out smart the market.
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