Mood Swings

Yesterday was nasty for the stock market and this followed a couple weeks of downward slide. That’s a rather abrupt shift from a long run of low volatility and solid returns since the pandemic lows. So what’s going on with the markets right now? Put simply, investors are in a bad mood after digesting too much bad news.

Even with all the technology, markets are still fundamentally human and are absolutely susceptible to mood swings. Some even suggest that the stock market has manic depressive tendencies. I’m inclined to agree. Start piling on bad news, even if it’s not all directly tied to the markets and economy, and the mood can go from ebullient to gloomy almost overnight. This might seem odd given what the market has shrugged off in the last 18 months, but nobody said it’s predictable.

Analyst outlook is solid, but right here right now the mood has turned sour. Individual investors had been growing increasingly bullish during the summer but turned sharply bearish as negative news began to mount.

The gut punch of Afghanistan policy. The delta variant, White House mandates, and fresh economic concerns. Growing consternation about Fed policy and the direction of interest rates. Congress debating more major spending initiatives and another major tax overhaul amid self-imposed tight deadlines. Another debt limit debate and U.S. default scare looming with all the corresponding rhetoric. And then news this past weekend that the second largest property developer in China could go bust, potentially leading to contagion. That sort of news out of China usually wouldn’t be such a big deal on a day that saw investors in a better mood. That wasn't yesterday, unfortunately. 

While these topics are being covered at length by many, the most pressing issues for investors are tax changes, more spending, and the debt ceiling debate. Along these lines I wanted to share a recent podcast from Michael Townsend, Schwab’s rep in Washington. Michael is a level-headed non-partisan who reports on all things D.C.-related. In this episode he breaks these issues down and discusses his growing concern with how things are evolving in Congress.

Even though I admit to feeling the mood myself lately, I’m not overly concerned from an investment standpoint. We have to deal with risk daily and I’ve been reminding myself in recent months how lucky we’ve been to see the kinds of investment returns we’ve had with such low volatility. That can’t last forever and a spike in “vol” like this is good for markets. It shakes things up a bit, creates opportunities for rebalancing, and allows new money to be put to work at lower prices. I wish volatility wasn’t so on-again-off-again, but that’s been the case for years now. We play our hand with the cards we’re dealt, right?

As I write this Tuesday morning it’s good to see the futures markets bouncing a bit from yesterday’s close. It was also good to see “the smart money” start buying in the last 15 minutes or so of yesterday’s market, causing the Dow to close down about 614 points, which was an improvement from being down over 900 at one point. That brightened the mood a smidge, but not like a strong Turnaround Tuesday would. We’ll see how things play out in the coming days.

Have questions? Ask me. I can help.

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