Fear, Greed, and the Stock Market
(Letter to Clients - Released to the public)
I hope this message finds you well. I wanted to provide you with an update on the current state of the financial landscape, as it directly impacts your investments and financial well-being.
Firstly, it's reassuring to note that, as of now, the US government has successfully avoided a shutdown in the near future. However, I understand that recent times have been marked by a confluence of factors that have left many investors feeling uncertain.
The persistent specter of a government shutdown, coupled with the challenge of high inflation and the need for elevated consumer interest rates, has exerted substantial pressure on the financial markets since the beginning of August. Additionally, the ongoing debate surrounding the potential for a US recession or a "soft landing" as a result of our efforts to combat inflation has only added to the prevailing apprehension within the market.
In this communication, I aim to delve into the two primary emotions that often steer market dynamics: fear and greed. I want to provide you with insights into how these emotions can influence investor behavior and, in turn, impact your investment portfolios.
As someone with a background in engineering, I find solace in the fact that the stock market is inherently driven by numbers—quantifiable data that can be analyzed and understood. It's intriguing that we can actually quantify the levels of fear and greed prevailing in the market at any given moment.
One of the most widely accepted metrics for gauging these emotions is the Fear-Greed Index provided by CNN. Today, I am pleased to offer you the most recent reading of the Fear-Greed Index, which is based on data from the most recent trading day, September 29, 2023.
Upon reviewing the index, it becomes evident that the current sentiment in the market is predominantly fear-driven. Remarkably, this marks the third instance in the past 12 months where fear has held sway over the market, with similar conditions witnessed in March 2023 and last October. Directly following the Fear-Greed Index, I have included a chart illustrating the performance of the S&P 500 index after reaching extreme fear levels.
What you will discover is that over the past year, the market has responded with double-digit gains following episodes of extreme fear. In a subsequent communication, we will explore what typically transpires after the market experiences extreme greed, which tends to yield contrasting results.
In conclusion, it's essential to recognize that while the Fear-Greed Index offers valuable insights, it is not a guaranteed tool for timing the market, nor does it definitively predict short-term market movements. However, we can draw upon historical data to provide context and clues about what may unfold in the future.
Speaking of recent history, both August and September have witnessed negative months for the market. In my next communication, I will delve into the historical patterns of consecutive negative months in the market and discuss our expectations for October.
Your financial well-being remains our top priority, and I am here to provide guidance and support as we navigate these challenging times together. Please feel free to reach out if you have any questions or concerns.
Maurice L. Wilson