Markets are high, but so is fear. Why?

October 18, 2019

T. Boone Pickens used to tell a story about a geologist who fell off a 10-story building. "When he blew past the fifth floor," T. Boone would say, "he thought to himself, 'So far so good.'"

The optimism of a wildcatter geologist is not what I'm seeing from people now. An anxiety around the economy and markets hangs in the air. It's different from the previous stock market booms I've witnessed. In the American tech bubble, optimism bubbled wildly at the peak, as startups mocked silly ideas like sales as antiquated. And in the real estate bubble, the casual dismissal of debt showed up for me personally; when I explained to my bankers that my mortgage application was transcribed incorrectly, the casual response was "You're good."

With the real estate index reaching an all-time high this week, and many other asset classes dancing near their ceilings, this is puzzling. I can think of three explanations, though feel free to email me if you have others.

1. The news around a possible recession has spilled over to the market. Whatever the market does, the recession fear looms larger and colors it.

2. The political situation in Washington upsets a sizable percentage of the nation, and that informs market outlooks to the negative.

3. The increase in information consumption has translated to a baseline increase in anxiety.

On the third point above, James Surowiecki, a financial columnist for the New Yorker, summarized a 1980's study by psychologist Paul B. Andreaseen. The less MIT business students knew about stocks, the better their performance. Surowiecki wrote:

"The reason, Andreassen suggested, was that news reports tend to overplay the importance of any particular piece of information. When a stock fell, its fall was typically portrayed as a sign that further trouble lay in wait, while a stock that was on the rise seemed to promise nothing but blue skies ahead. As a result, the students who had access to the news overreacted. Because they took each piece of information as excessively meaningful, they bought and sold far more frequently than the people who were just looking at the price."

The key part of that statement is "they took each piece of information as excessively meaningful." Smartphones have exacerbated the skyrocketing trend of information, making judgment around meaning more difficult.

Keep in mind that the sentiment is not what matters. The investment plan, and the careful consideration of risk, win the day.

Dan Cunningham

1. T. Boone. What a name by the way. That's up there with Yo-Yo Ma in terms of memorability.
2. The real estate index referenced is the Vanguard Real Estate ETF.
3. Fast Company: Too Much Information, 11/30/2002