The Year in Review: A Balance of Fear and Greed

By Kevin Kern

Founding Partner

Long before the November 2020 vaccine announcements greed already had a strong hold on investor fear.   Investors who were paralyzed in the spring had already put their mortality aside by summer and began to bet on pandemic perfect businesses such as ecommerce, gambling, cloud and online streaming.

As some investors went to cash others increased margin to leverage speculation.  Washington and the Federal Reserve orchestrated massive fiscal and monetary policy that fueled equities like a multi staged titan missile launching the valuations of large cap tech stocks with businesses that flourished during the pandemic.  The stimulus ultimately began to support the COVID casualty companies as well.  With the bottom of the market now supported, the large technology companies took the capital weighted S&P 500 Index up with them.  Investors now had a false sense of reality and before we could say “Pfizer vaccine” the stock market was heading for orbit.  Yet most of the economy was still grasping for oxygen.

Enter greed and boredom.

COVID cash rich shut-ins used their newly minted deficit dollars to play the market. Stocks became the preferred choice over sports gambling.  And why not, stocks provided a daily bet.  The crisis was clearly making underdogs and favorites.  Younger Americans who had limited COVID concerns were strapped in as social media made the stock market better than Xbox.   Short squeezes that would make a 19th century robber baron blush were being hatched from basements while upstairs parents were fearing the lives of their parents.

Fear was waning.

While an upcoming election had us arguing with our relatives over the fourth of July holiday, COVID infections were growing as fast as the FAANG* stocks by the fall. In September, Federal Reserve Chairman Powell signaled that inflation would not be a threat for raising interest rates any time soon.  Higher interest rates would be kryptonite to the already high valuation tech stocks.  Lower interest rates would fuel stocks and lending. With that statement, the Fed made stocks more attractive than bonds.

Early November brought the Pfizer and Moderna vaccine announcements.  Until that point the S&P 500 had been elevated by a handful tech stocks making up most of the index’s 2020 return. Like wind to a California brushfire, investors could now shift their attention to companies that were severely undervalued.  The neglected financials, energy, industrials, consumer discretionary now offered a place for investor dollars seeking value.

Greed was now in full control.

Investors shouldn’t forget the fear of a year ago when commerce and companionship was turned off.  And we should also learn from the recovery and the greed that ensued. Both greed and fear can protect and also paralyze.  A small dose of each never hurt but investors should keep each emotion in check.

We are now at the beginning of a global recovery, the likes of which we have not seen since the end of WWII. This is not something to fear but to embrace.  Predictably the stock market will over shoot with enthusiasm and high-flying stocks, sectors and regions will need to come back to earth. Investors still leaning heavily towards greed or fear may handicap their long-term financial plans. It’s time to review your allocations in stocks, bonds and cash based on your risk parameters and goals.  If you depleted your cash reserves or never had, this would be a good time to rebalanced and build it back up.

A diversified portfolio combining U.S. and international stocks and bonds with reasonable holding allocations should stand up better as markets come back to earth after what could be a very robust recovery.  Our wealth advisors are ready to assist you in reviewing this process. We are also providing the booklet on Creative Methods to Reducing Concentrated Positions on Your Terms.


*FAANG (Facebook, Amazon, Apple, Netflix and Google)

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