Inside the mind of investors - Jan 2023

Investors have snuggled into the new year despite suspicions of a close-by Armageddon, many unknown unknowns and near-guaranteed volatilities.

Effective investor relations relies on understanding the thinking behind market behaviours. So every month Edison brings you Inside the mind of investors.

Current stock market rallies are confusing to the average outsider. Given ‘everything’ – and there is a lot of ‘everything’ to go round – what is going on inside investors’ minds? Why are markets and indices like the Dow, S&P, CAC, DAX and Footsie up while many businesses are hurting?

The simple answer is that, rolling around the conscious thoughts of almost every investor, one shared post-traumatic anxiety is unifying the mood: there could be (much) worse to come.?

And that collective stomach-churner is making the present look rosy by comparison.

Which is why, as the year began, asset managers stopped selling and snuggled into a cosy nook. And their moment of refuge is being sustained by better-than-feared macroeconomics. And, in relative terms at least, buoyant trading updates.?

We’ve heard it said: ‘Sure, we’re in a prolonged period of higher inflation and higher interest rates will persist. Yet you and yours, the consumers, are still spending more than predicted and businesses, especially in the United States, keep on hiring.’

The market, it seems, had catastrophized and gotten ahead of the numbers.?

The fear, of course, is explicable. Investors know that we are moving from a benign period of ‘free money’ with zero interest rates, to one of uncertain characteristics.?

However, one certainty is that the new reality is less benign. Tranquillity is unlikely to return any time soon because, with uncertainty, volatility becomes normalised.?

Time and again investors are likely to be lulled into a false sense of security, only to have reality impinge rudely one wet Tuesday afternoon. Then, just weeks later, they will discover that they have overreacted and things don’t seem as dark.

And along the way, we will all find out what it means for fiscal policy to be resurgent, as central banks and monetary policy become somewhat hamstrung.

Finally, there is something else that no one doubts: whatever happens in the global economy, money will be made; and market behaviours will pivot and settle.?

Armageddon? Not so much.