Fear and Greed Index

“We are now in a bear market – here’s what that means.”

CNBC headline on December 24, 2018

“The stock market rally to start 2019 is one for the history books.”

CNBC headline on February 22, 2019

If you’re like most people, it’s probably not uncommon for you to plan your day or week based on the weather forecast.  For example, you might check the forecast, see that it’s supposed to be sunny, and decide to go golfing on Saturday.

Then Saturday rolls around and it starts to rain (especially this Spring in Atlanta)!

This isn’t all that different from how investors and analysts often feel about the markets. The forecast says one thing – and then the opposite happens.

For example, look at the fourth quarter of last year.  The markets were hammered by volatility.  The NASDAQ entered bear market territory, and many economists were predicting even more volatility after the new year.

But, here we are, four months into the new year and the markets are on the verge of record highs!

Why the change in direction? What’s behind this year’s market rally? And most importantly, what can we learn from it?

The volatility that dominated the end of 2018 was largely political and not really a reflection of the economy, which continues to show strength.  Trade tensions, as a result of the new tariffs with China, were real, and the standstill in Washington evoked widespread disillusionment, which translated into a horrible quarter for stocks.

The result of all these signals was a forecast that had many investors reaching for their umbrellas, convinced that gloomy weather was here to stay.

But instead, the markets enjoyed their strongest start to a year since 1998.

In many ways, this rally has been driven by something very simple: Economically nothing really got worse.  The Federal Reserve has stopped raising interest rates, saying that it won’t raise them again in 2019.  The trade war with China seems to have hit a lull.  And now, investors seem not to be phased or surprised by anything coming out of our nation’s capital any longer!

So, does that mean the good times are here to stay?

Not necessarily.

Warren Buffett, the legendary investor, has a saying: “Be fearful when others are greedy and greedy when others are fearful.” While we shouldn’t take that maxim too literally, it does illustrate an important point. Time after time, conditions that cause fear can change in an instant, leaving the fearful behind. On the other hand, conditions that stoke greed can shift before you know it, giving the greedy a nasty shock.

On their website, CNN has something called the Fear & Greed Index. Using seven different indicators, they can calculate which emotion is driving the markets most at any given time. As of this writing, that emotion is greed. A few months ago, it was fear. As we’ve just seen, the scale can swing from one end to another very quickly.

Here’s what we can learn from all this:

First, we need to remember that just because something has happened recently, that doesn’t make it an unwavering trend.  Markets don’t go up and up.  Neither do they go down and down!  Markets go up and down, but tend to trend upwards over long periods of time.  We need to guard against panicking during market volatility or taking on unnecessary risk during a market rally.

Second, remember that emotion can color our decisions in ways that are unproductive.  Emotion helps us interact with other people.  It makes experiences more memorable and life more colorful.  But it can be harmful if it drives our decisions. We should always strive to keep our own personal Fear & Greed Index from swinging too sharply one way or the other.

Instead, we should make decisions as we’ve always done: by keeping our long-term goals foremost in mind and having the patience and discipline to wait out the market sell-offs and to thrive during the market rallies.  Don’t let your own Fear & Greed Index blindside you from your true objectives.