Markets’ Focus is the Future – With Emotions Ruling the Focus at Times
CAMS Weekly View from the Corner – Week ending 3/20/2020
March 23, 2020
With the general carnage throughout the investment landscape it is important to register the process of markets generally, and collective market participant psychology specifically.
The absolute mantra of markets and collective participant psychology is a forward basis outlook.
Add to this the complexity of crowd psychology of said market participants and that crowd psychology can lead to rampant fear in times of stress. The fear factor can and does lead to overshooting.
When collective fear takes over, the all important collective reasoning goes out the door. It is the collective reasoning, throughout time, that makes markets so effective in pricing assets.
When fear enters, the message gets scrambled until reasoning enters back into the fray.
By-the-way, the exact opposite of the above takes place when markets go up and up and up which then, rather than fear, it is collective greed and over-enthusiasm that takes over the herd.
When over-enthusiasm takes center stage reasonable assessments are replaced with ridiculous justifications for why/how “x” investment will shoot to the moon and far past that.
This always invites the inevitable hard fall just when said participants were far to lathered up with their overzealous expectations of endless wealth creation.
On a completely personal note, for my part, I dislike both of the above psychological landscapes because in both environments employing reason and sharing accordingly can rarely even be heard by the masses (they are too gripped in fear or overzealous enthusiasm) and in fact, am often ridiculed.
To current day we are gripped in the fear side of the collective psychology when it comes to the investment landscape.
Market participants; rightfully get quite confused on forward assessments when unknowns come onto the scene. A virus with general societal lockdown is certainly an unknown and certainly becomes breeding grounds for fear taking over and reasoning being cast aside.
What we can do is digest the human aspect of markets by taking a thoughtful approach to assessing this moment on a forward basis. I emphasize “this moment” in that being truly centered in the moment experientially takes us from a “past focus” and the accompanying fear and allows for a mental landscape for reason to re-enter.
To get a somewhat historical sense of the downside and to put that under the honest lens of whether fear has taken a solid hold I thought it timely to look at the stock market itself.
The well recognized S&P 500 Index represents 500 companies. What is often unknown is the price behavior of this traditional Index actually is weighted to larger more dominant size companies within it. When truly talking the “stock market” I like to use what is known as the equal weighted S&P 500 which means all 500 companies impact the price of the index the same.
With this, it is a good measure of the stock market at large. Speaking to this the equal weighted S&P 500 is down 35% now in 2020. This drop has occurred in just over 3 weeks. More startling, the bulk of that drop has occurred in the last 10 trading days. Do you think fear has solidly entered onto the scene?
For historical perspective, remember the Great Recession of 2008/09 and how the Financial System nearly came to a halt? In the most fear based period of time, at that time, this same equal weighted S&P 500 Index dropped a similar amount but took 3 months to do so! For emphasis, I offer again, we have done this in just over 3 weeks.
One of the hallmarks of a market that is overran with fear and devoid of reasoning is that everything takes a notable downside hit – think a shot gun blast approach.
With this, to help identify if there is any reasoning entering back into the fray we look for market participants to show they are willing to begin to differentiate between investments. To my surprise, by the time last week ended there were some very subtle signs that participants started to differentiate.
Historically, fear gripped experiences bottom out when participants are clearly showing they are entering reasoning back into the fold. We are not seeing an abundance of this yet but we have seen some which is how bottoms begin, historically speaking.
Like the virus itself – this will be a process. Markets putting in bottoms in a fear gripped experience are messy and give headline creating volatility that raises fear and emotions further.
History offers us in droves that markets recover before the underlying economic issue improves just as markets drop before the underlying economic issue is recognized. Hence their forward focus.
Differentiation has marginally begun – now we monitor closely to see if this expands and as it does it will be telling us that reasoning is re-entering the landscape. Fear giving way to reasoning is how market bottoms take hold.
Please be safe and care for yourself well, and in so doing, you will be caring for others simultaneously.
I wish you well…
Director, Market Research & Portfolio Analysis
Portfolio Manager, CAMS Spectrum Portfolio
H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.
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