On The Fear and Greed Cycle
One of the most challenging times for investors is a market downturn. Whether markets are experiencing a correction or a bear market, it’s really disturbing to watch the value of your savings and investments decline.
Last week, the CNN Business Fear & Greed Index showed extreme fear was the emotion driving investment decisions. The Index “is a way to gauge stock market movements and whether stocks are fairly priced. The theory is based on the logic that excessive fear tends to drive down share prices, and too much greed tends to have the opposite effect.”
During times like these, many investors succumb to fear and take actions that damage their ability to reach their financial goals. The fear and greed cycle works like this:
It’s counterintuitive, but many think the time when investors should be greedy is when the market nears a bottom.4 That’s when it may be possible to find shares with strong fundamentals that are selling at attractive prices. Since no one really knows when a turning point will occur, investors who decide to buy low may experience losses before they realize gains.
Last week, major U.S. stock indices moved lower.
If you’re feeling fearful, let us know. One of our most important roles is helping clients stay focused on financial goals, maintain a disciplined investment approach, and keep a long-term perspective in difficult markets.
…Here’s something to remember during volatile markets when the desire to sell may be strong: Our brains are hard-wired to avoid loss. Studies have found the pain of loss is far more powerful than the pleasure of gain. This is called loss aversion.
Overcoming loss aversion isn’t easy. One thing that may help is understanding a situation more clearly. For example, knowing more about bear markets may help reduce the fear of these market declines. Here are some facts to consider:
A recession is often defined as an economic slowdown or contraction that persists for two quarters (six months). The United States economy contracted during the first quarter of 2022. Although forecasters say there is a low probability (19.6 percent) the economy will contract again during the second quarter, according to a survey conducted by the Philadelphia Federal Reserve. The probability of a quarterly contraction increases (28.2 percent) in early 2023.
It's unclear whether the U.S. will experience a recession. A lot depends on the Federal Reserve’s fight against inflation, which has been made even trickier by the Russia-Ukraine War and lockdowns in China.
“What good is the warmth of summer, without the cold of winter to give it sweetness.”
—John Steinbeck, author
https://www.economist.com/finance-and-economics/2022/05/15/global-growth-is-slowing-but-not-stopping-yet (or go to