The S&P 500 broke the 5,000 level recently for
the first time in history as investors embraced euphoria and rallied.1And
then tumbled as investors got jittery.2 Then yo-yo'd a bit more.
What's going on? Let's talk about
investor psychology.
(Don't want a dive into markets? Scroll down to my
P.S. for a big-picture question. I'm eager to hear your thoughts.)
Fear and greed are the two halves of the
investor psychology coin.
When investors are feeling greedy and exuberant,
they buy in the hopes of making a big profit, driving markets up. When
sentiment turns, and they start feeling fearful, they sell in the hopes of
avoiding losses, driving markets down. The rollercoaster of investor psychology
can take over and push markets in directions that don't always jibe with the
underlying financial and economic fundamentals. We're seeing that push-pull in
action right now as investors weigh the likelihood of future interest rate cuts
and price out different scenarios.
What positive factors support the rally?
1. Employment is strong, and the most recent report
stunned economists with over 350,000 jobs added in January. Though some of the
surprise increase can be attributed to seasonal effects, the overall trend is
encouraging. 3
2. The U.S. economy may be re-accelerating. The
running "unofficial" forecasts by the Atlanta Fed show Q1 economic growth
coming in above 3%, trending higher than earlier estimates.4
3. The Fed has forecasted multiple rate cuts in
2024, which would make credit cheaper to access and support business growth.5
What negative factors could trigger a
pullback?
1. Pullbacks are normal and expected after markets
experience a sustained rally.
2. Inflation is generally trending lower, but the
latest data shows prices rose more than expected in January.6 If
inflation remains stubborn, it could raise the specter of a "hard landing"
recession and spook markets.
3. Investors are counting on interest rates coming
down soon. If the Fed indicates it will delay cuts, investors could rethink
their optimism.
Bottom line: Volatility is high,
and we'll likely see markets continue to rally and retreat as investors
consider their next moves and price in new data.
We are watching closely and will reach out if we
have any specific advice for you.
P.S. What's fantastic about being the age that you
are right now? What's unexpected? I'd love to hear your perspective.
In the meantime, do you have any questions? Send us an email
and let us know.
Sources
1. https://www.cnbc.com/2024/02/11/stock-market-today-live-updates.html
2. https://www.cnbc.com/2024/02/13/stock-market-today-live-updates.html
4. https://www.atlantafed.org/-/media/documents/cqer/researchcq/gdpnow/RealGDPTrackingSlides.pdf
5. https://www.cnbc.com/select/when-will-interest-rates-drop/
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