Should I be excited or fearful?
I once read that there are only two emotions that the market has...fear and greed. Many people took
that and expounded on it by stating the following: Buy when people are fearful and sell when people
are greedy.
Fear and Greed
I am often of the opinion that society runs on the fuel of fear. Granted, there are many logical reasons
to be fearful. All we have to do is watch the news, read Facebook posts, etc. In this current climate,
fear sells. I am also of the opinion that this is what the giant American political circus focusses on as
well. We should fear so and so because of fill in the blank. We should vote for so and so because the
opponent will do or be fill in the blank.
Fear is a powerful motivator. It is easy to understand why markets can be heavily swayed by fear
because fear has the ability to blind us to optimism. Fear removes optimism.
Another factor that increases fear is born of the right now. We see and acutely feel what is right in front
of us or on our plate, demanding our mental focus, thus coloring the future in fear. The death of
optimism. I also think that fear is based more on emotions and feelings of the unknown than data and
what is known.
To be certain, there is a tremendous amount of uncertainty and fear happening in our country right
now. It is times like this that may prove that buying when others are fearful is beneficial.
I often joke that my crystal ball has a crack in it. I am not a forecaster or prognosticator. I simply try and
analyze data and then make a best guess on what might occur.
Let’s look at some data
I recently logged on to listen to a podcast hosted by Barry Ritholtz called Masters in Business. Barry’s
guests are truly a list of who's who in economics and business. Last week, he aired an interview with Dr.
Jeremy Siegal. Dr. Siegal obtained his undergrad degree in mathematics and finance at Columbia and
went on to earn his Ph.D. from Columbia University in 1971. He is currently the Russell E Palmer
Professor of Finance at the vaunted Wharton School of the University of Pennsylvania. In addition, he
has authored more papers and columns that can be added up. He has written three books and is
credited in the Concise Encyclopedia of Economics.
I could go on and on about him, it would be a book in and of itself. What I want to do is highlight some
data he shared in the podcast. Much of what he said is obviously steeped in economic terms so allow
me to provide a definition for those who are less educated in economics.
M1 Money Supply
M1 is the term that used to describe the nation's current money supply. This is made up of all demand
deposits and checking accounts in the country. All the cash money added up. This figure does NOT
include stocks, bonds, savings accounts, CD’s and the like. This is strictly get my hands on it cash in my
checking account. Why is this important to follow?
As the M1 goes, so often does the stock market. Simply stated, the more money people have, the more
likely it is that they will spend that money thus driving the economy and the stock market. Business is
good when people are spending money. Make sense?
Current M1
During this time of Covid, the M1 has INCREASED almost 25%. This is number that has NEVER been seen
before. Remember the banking crisis in ‘08? At that time M1 was down to 15% in one year. One year.
The current INCREASE happened in two months! The average checking account in this nation is HIGHER
by 20% on average than normal. Let that sink in.
In addition, we know that Fed is committed to neat 0% interest rates. The government injected $3
trillion of money into the system. Not to banks, not to business, but to folk’s checking accounts.
Further, the savings rate, different from M1 is now in double digits for the first time EVER.
The Big If
So now the big if. What if we get a vaccine for Covid? The economy opens up with people having more
money in M1 than ever before. So far, this recipe sounds pretty good for the market.
According to Siegal, we could be on the deck for the lowest bonds yields ever in our history. He feels
that rates slowly will start to rise. He feels that we are at a generational if not the lowest we will ever be
in rates. If bonds are not paying much interest, i.e. low yields, and the economy is improving, with the
highest M1 rates out here what do you think happens to Wall Street?
Remember that this was an hour-long interview that I am trying to sum up in a couple of pages so
obviously much is left out. This is simply the data of where we are now. There are MANY factors that
could come into play. For instance, Siegal feels tax rates should remain low and a vaccine needs to
happen. Should all this occur, it lends to a very optimistic outlook on the markets with Siegal predicting
the stock market could be fantastic in 2021.
Keep in mind that the data is the just that data. They are numbers devoid of feeling and emotion. The
do not tell the future but can leave clues. I will remain diligent in maintaining allocations correctly for
each individual and look forward to a good future.
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