Fear is the New Black
China, Tariff Wars, Hong Kong, Brexit, inversion, negative rates, the ‘summer swoons’, black boxes, high frequency trading, low volumes, earnings scares, muddling through...
And the list goes on and on.
New financial threats appear and disappear behind us like steps along the path to progressive solutions; each in turn seemingly worse, scarier and more damaging to your interests than the last.
See the headline from CNBC yesterday:
That old chestnut?
It’s not the curve inversion they’ve been terrifying you with for the last 4-6 months, but what they say when it goes back in the other direction.
That’ll be bad too - probably even worse and worserer…and dumb and dumberer.
Harken ye back to the summer of 2008: Oil hit $148 a barrel and the headlines screamed about how the end of life as we knew it was on our doorstep.
Fast forward eight years, as technology washed over the oil fields, and the world was also apparently on its knees with oil dropping down to $26 a barrel.
How about "the worst start for the markets in 85 years" in the beginning of 2016.
And yet here we are now, paying less for gas and terrified for doing so.
All the while the crowd did its part by rapidly abiding by the robotic nature of fearmongering, emotion-triggering headlines and sold the markets down by 14%.
The tick-by-tick countdown to "inversion Armageddon" has even resulted in black box trading algorithms, which now read headlines looking for the word "inversion" and instantaneously trigger a waterfall of sell orders.
That’s perfect for all the "passive ETF investing" going on today.
How Not to Selling Everything
And the herd is still at work. Wave after wave of deeply frightened investors, bombarded by headlines telling you to fear the inevitable, are flooding bond markets in the US.
Buying is begetting more buying.
In 1999 is was .com anything.
Today it’s the 10-Year Government Bond – enjoy the lousy returns. Or you could head east and get a guaranteed return of less than what you put in.
Have a look at this:
Fear is the New Black
All of this August summer swoon garbage is having the pronounced affect.
And just before we move on to sentiment readings, which is once again firmly in the tank, note the German 10-year above. That’s right, MINUS nearly 3/4's of a percent.
Holy inversion, Batman!
If you think no one is actually listening to the “experts” breathlessly opining about the coming end of the world as we once knew it, think again.
And there it is:
At no time has it been wide to be impatient.
Just How Expensive is Fear?
Well, check the below chart from the great team at Bespoke:
Keep This in Mind...
It’s not just the crowd getting terrified. Both bullish and bearish sentiment readings were at a historic extremes (over 1 standard deviation away from the historical average) in the latest data - and for the second week in a row.
Typically, these can be taken as a contrarian bullish sign.
In the past, there have been 16 other times that bearish sentiment was over 1 standard deviation above its average while bullish sentiment was over 1 standard deviation below its historical average for two consecutive weeks.
And, as you’ll see below, both average and median performance for the S&P 500 have been very strong in the weeks and months after, with the S&P 500 moving higher over 80% of the time across each of these periods.
We are witnessing the same type of incessant, fear-driving chatter we get fed every summer. Make no mistake, when the crowd leaves the media just turns up the noise to get your attention. If they don't get you to watch they don't make any money.
In short, you are the cost of goods and so is your portfolio.
So, ignore that crap they’re ladling and consider this: during the final weeks of the summer haze:
Don’t underestimate how fake news can impact your behaviour and your investments.
Remember that all of this stuff is happening while the "terrible China Tariff War is underway...."
It’s times like these when long-term investors begin to learn what they get paid for as patience levels will be tested, and emotions will be powerful.