When Market Fear Becomes a Self-Fulfilling Prophecy

Let’s take a trip backwards to help us look forward.

The chart below shows us the Great Recession Lows in March 2009, when everyone REALLY swore they would never invest again. 

Just about everyone concluded that the market was rigged:

We know that about $14 trillion has accumulated in cash accounts (M2) of US consumers alone since those lows.

For perspective, that's 65% of US annual GDP – meaning there are levels of fear out there like we’ve e never seen before.

Note (above) the lowest readings around ground-zero of that Armageddon, with all-hands-on-deck fear for the global economy.

The red and green arrows overlap because the low reading in sentiment this time was actually the "go" sign for the new rally; the lows from which the markets have never looked back.

Consider that:

• The lowest reading then - at Dow Jones 6,700 was 18.92%
• Today we are three times higher, and yet we remain within 2% of the same levels of fear.

Now, this does not mean to suggest the low is here. No one knows that data.  The low will be seen in the rear view mirror.

Here’s The Point

Fear has a way of becoming self-fulfilling. 

If you scare people for long enough, despite the age-old fallacy that the market calls a recession 6-8 months in advance, the crowd will still act on those embedded fears.

They pound us with garbage media, even false news as required that’s designed solely to get attention, and you will get a reaction. The nice dinner out with the family becomes a video at home, the new car purchase gets pushed off for six months, and the kitchen upgrade gets put on hold.

And as for that new house, well, we can just make do with the one we’ve got for now.

You get the point; even when all is fine you can cause a shift in behaviour with no real reason at all beyond all the mischief made up by the media. 

All it takes is a little step here or there and a tug on the reins of confidence.  Multiply those impacts by 150 million families and, bingo! The slowdown that the market allegedly called arrives.

It’s like watching a house cat for a few days in a new environment. Watch how often ‘kitty’ gets spooked and runs to hide despite nothing of any importance actually happening.

That my friends is why we constantly want to impress upon you that patience - and the ability to look beyond your emotions - is the true driver of finding the long-term benefit of compounding wealth.

Sure, it sucks right now. And it always sounds smarter to be negative and believe what the media is telling you. But it all also sounded wise and prudent every other time they got it wrong.

I was in an interview once where Mr. Buffett was being asked, "How did you accumulate all this wealth in the stock market?"

He said: “I bought a few good companies and then I didn't do much of anything after that..."

So, in the midst of what seems like a time when the sky really is falling again, remember that:

• It's never as good as it seems or as bad as it feels, and
• It provides the back-drop for a very good contrary lesson in fears.

And Then There’s This…

Yes, this is all ugly.

And yes, praying for a correction causes discomfort sometimes, but it builds what is required for long-term benefit.

My Hunch? 

Warren Buffett is not selling right now, he’s buying.

Good planning permits you to be patient and stay focused on the long-term horizon ahead.

Now take one more look at the contrary nature of the crowd's emotions (above). We are now more afraid collectively than we were when the 2016 sell-off was over at Dow Jones 15,600. 

We try very hard to teach the lesson of patience. 

That’s because no matter how difficult it is at times, being afraid of or betting against the long-term future of the United States has never been productive. 

Remember that during the short-term windows like the one we are living through right now.