By Guest Blogger Ryan Lewenza
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Having been through three bear markets over my investment career I can now spot clear and repeatable patterns of investor behaviour. Currently, investment decisions are being made on fear and emotion (based on what people see on the TV or read on their iPhones) rather than sound economic principles or any consideration of what the economy will look like in 12 to 18 months. Given all the uncertainty right now the markets are pricing in a protracted recession and that we’ll all be locked in our homes indefinitely, when in fact by Q4 and into early 2021, economic growth could be rebounding and potentially strongly.
Credit Suisse US GDP Forecast
Source: Credit Suisse
Here’s how the pattern generally plays out.
As the market steadily rises, like we saw over the last decade, this can lead to excessive optimism and greed taking over. During these periods many investors want to take on more and more risk as they get caught up in the euphoria of the strong market gains. Then as the economy/market begins to roll over the optimism quickly changes to anxiety and fear, then to panic and capitulation, and finally full-on depression.
You can basically map this out on a curve and I believe we’re getting close to the panic/capitulation/depression stage. And this is when markets typically bottom, providing the best opportunities and future returns. Side note: I hate talking about “opportunities” when there is so much human suffering right now, but I know we’ll come out of this and I still have to look after our client’s home down-payment funds, their kids’ education accounts, and their retirement nest egg.
So what does this look like?
Examples of this include things like “Ryan, this time it’s different”, “Ryan, this is going to be a depression”, “Ryan, I’ll never get back to where I was before it fell”. Or on CNBC when this week I saw a commercial hawking gold coins stating that this is the investment to own during pandemics and recessions. I heard these exact same statements and that stupid commercial back in 2008/09.
In 2008, during the financial crisis, people said the banks were going under and the next great depression was right around the corner. But it didn’t happen. The central banks and governments came to the rescue and implemented the measures needed to turn the economy around leading to one of the strongest bull markets in history (yes with a lot more debt but we’ll deal with that in a decade).
Today the problem is different in that it’s a health/pandemic scare, which will require a different set of solutions to the problem, but ultimately we’ll figure it out like we did during the financial crisis, 9/11, tech crash, Black Monday, wars etc.
So what I’m seeing on CNBC, and what I’m hearing from some investors and clients, makes me even more convinced we’re getting closer to the bottom in the markets (peak of infection rates?) and that the economy and markets will recover from this unprecedented and historic event.
Let’s revisit that roller-coaster of investor emotions Garth published here last week. Where do you think we are now?
Typical Investor Over a Market Cycle
Source: BMO
Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.