Every Drunk Must Have His Drink

Investor psychology is changing, and it is changing very rapidly. A line from a popular 1980′s song by Billy Joel entitled “Don’t Ask Me Why” helps explain what is going on, but I will get to that in a minute.

As June market activity concludes today, we may look back at the past month as a “pivot point” for stock and bond investors everywhere. This rapid transition will completely change how investors view their choices for where to place their hard-earned capital.

Of the myriad reasons why the investor’s emotional disposition has reached this point, one stands out to me like pulled pork at a Bar Mitzvah meal. It’s the false sense of security that results from the continuous support markets have received from the U.S. Federal Reserve (“The Fed”) and other so-called central banks around the world, especially in China . In June, the realization finally set in that U.S. stock market gains of the past four years were largely due to investors’ belief that central banks would do whatever was necessary to keep the economy from eroding so soon after the financial crisis of 2008.

Why do I say this? Because every market “reaction” in recent years can be directly tied to some news item which prompted concern by market participants that the support might be ending. The market’s biggest fear: that the economy may not be able to thrive on its own. Or, as referred to in this week’s title, the drunk just can’t resist a drink and without it, he falls apart.

Some in the mass-hysteria-media tie the current market fears to the sharp rise in interest rates in longer-term bonds during June. But that seems to me to be a secondary reaction. Why are rates going up? Because bonds are being sold off by investors in a panic. Why are they panicking? Because if the Fed and its international counterparts let the economy thrive or dive on its own…it may dive. And the markets know that once the salve of artificially low rates goes away, the bar is dry and the drunk has no choice but to deal with that…and it won’t be pretty.

So, is this the moment to sell all of your assets and hide? NO, but it certainly is a time to be aware of the psychological change taking place in investor behavior and to have an investment approach that by its nature is adaptable to such enormous changes in investor perception. I get a strong feeling we are entering another period in which, like the economy, some investors and financial advisors will thrive…and others will dive. Are you prepared?

© Sungarden Investment Management


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