The chart you see above is one that has been presented in many forms over the past couple of decades. Throughout the current century, this simple graph of the emotional roller coaster that is investing, as well as life itself, has been a very helpful tool for people in my industry. My only question today is, where are we on the Cycle of Market Emotions? To help you along, I have accompanied the standard one-word descriptions of each stage of the cycle with an emoji, making this version the “Cycle of Market Emojis.”
SO, WHERE ARE WE?
We can never know for sure, and this can and is debated every day throughout the investment industry, the financial media and water coolers, bars and coffee houses everywhere. I strongly believe we can narrow the aggregate emotions of today’s investment market climate down to a small area of the 12 different stages pictured above. Here’s my take:
THRILL – to paraphrase the iconic scene from “The Graduate,” I have one word for you…Bitcoin! It is not that crypto currency is not a budding element of the global economy. It’s the speculation produced by the “products” (the many invisible currencies that have been created) that makes me think we could be at the thrill stage.
And, the THRILL stage rationale is not limited to that crypto-mania. In the traditional financial markets, ETFs, fancy derivatives, and other explosions in “product development” smack of past eras of good ideas that were taken too far by Wall Street’s brainiacs. I am as big an ETF fan as the next person, but there are so many products competing for the same dollar, your focus should be on separating the truly helpful ones from the gimmicks and copycats. The related issue with the ETF business is that so much of the wealth piling into them is going into the same couple of handfuls of funds. That has historically been something that worked for a while, but then the herd mentality was broken, and steep losses were the result. Know what you own!
Even the financial advice industry is showing signs of THRILL level behavior. The Robo Advice industry, a great idea, has now become a “pile-on,” with firms competing to essentially not deliver advice. This appears to me to be classic bull market behavior, spurred on by easy money from the Fed.
EUPHORIA – Everything you just read under THRILL applies to EUPHORIA as well. The only difference is that EUPHORIA is effectively the very end stage of the “good times” for many investors. Then, only the flexible and adaptive types survive. In the year 2000, we went from THRILL to EUPHORIA in a matter of a few months. The S&P 500 and Nasdaq went straight up like the Empire State Building, and then in a flash it was on the way down…for 3 years.
In the Financial Crisis of 2007-2009, we saw the market and investor emotions go from Euphoria to Despair in a mere 18 months. And back in 1987, that transition happened in a matter of a few weeks, culminating with the October 19, 23% drop in the Dow Jones Industrial Average.
Whether we are at THRILL or EUPHORIA, it does not matter much. It is likely late in the game. The nimble investment types can squeeze a bit more out of the move from THRILL to EUPHORIA, if that indeed is what occurs in the months ahead. But don’t get sucked into believing that you can sit patiently while that is occurring.
COMPLACENCY – And that brings us to the third possibility I see for the current emotional state of the markets. In an upcoming article, I will simply show you a pair of “towers.” One will stack up all the major investment market factors that I consider to favor “reward” in that they are positive signs. The other tower will do the same, but for those factors that favor “risk” in that they are threats to your wealth in the foreseeable future. If we are indeed in the COMPLACENCY stage, we will very soon start to see the many factors in the “risk” stack start to actually matter to investors. If those very real present threats to wealth continue to be ignored by very resilient major market indexes, we know we are still in the THRILL or EUPHORIA stage.
That’s my take on this iconic measure of market emotions. I welcome your thoughts on it as well. After all, together we all make up “the market” and its emotions.
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