Market Strategy • Psychological Perspective

Embrace the Suck: Investing in Periods of Fear

The S&P 500 was down 4.38% in 2018—the first down year since 2008 and the worst December since 1931. However, I believe fear is a useful and necessary aspect of investing. There are two types of fear: the fear of missing out, and the fear of losing too much money.

The Valuation Quandary

Going into 2019, the market is cheaper than it was in the middle of 2018. When we look at forward multiples, the gap between equities and bonds is striking:

Technology deflation is affecting the relationship between the Federal Reserve and Inflation. Whether it is Amazon in retail, fracking in energy, or fintech in finance, new technology is putting downward pressure on prices, keeping inflation in check. All this seems to be creating a quandary for the Fed.

2019 Outlook: The Dovish Pivot

The world’s two biggest economies are simultaneously undertaking more dovish monetary policy. China is boosting markets with govt bonds and less stringent lending, while the Fed has backed off ‘auto-pilot’ to be more patient and flexible. This should be a significant tailwind for risk assets which have become inexpensive by historical standards.

Selling into a downdraft has never been the right thing to do. The market is one giant complex neural network which adaptively incorporates the collective expectations of investors. In due time, I believe investors will regret not adding more capital to these investments.