The Only Thing We Have To Fear…

President Franklin Delano Roosevelt’s first inaugural address is remembered to this day, almost 90 years later. March 1933 was near the depths of the Great Depression, and he knew that he needed to set a more positive tone for a nervous nation. Talking to the nation using the relatively new technology of radio, his speech contained a line that still resonates: “the only thing we have to fear is fear itself”. That certainly does not describe the current market environment, but I would flip FDR’s idea on its head. The thing that investors have to fear most is a lack of fear itself. 

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Experienced investors know that the statement is not as absurd as it sounds on the surface. Stock prices are rooted in expectations: expectations for higher sales, higher earnings, lower rates, a stronger economy, etc. As expectations ratchet higher, investment flows follow. This is a virtuous circle under normal circumstances. Participants in the economy become more confident in their own welfare, markets become more confident as people spend money on the goods and services provided by companies, and the cycle repeats. But every cycle runs its course. The questions are when and how?

A recent example of the lack of fear causing a crisis came in February 2018. In the months leading up to that date, equity markets had been moving steadily higher, buoyed by a solid economy and the prospect of tax cut legislation. Every day seemed to bring a higher market, even after the tax cuts were signed into law in December 2017. The VIX index seemed to be plumbing new lows on a daily basis during this period, as investors became increasingly sanguine about the markets’ continued prospects. That all came to a crashing halt in early February. Major indices plunged over 10% that month and the VIX index more than tripled from its lows. The consensus became too broad that markets could only improve and do so in a controlled manner. The news at that time was uniformly positive for equities, yet expectations surpassed the immediate reality.

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The information in this material is provided for informational purposes only and does not constitute tax advice and cannot be used by ...

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