2018 – A Year of Fear, Greed and Loathing on Wall Street

When it comes to ascertaining why markets behave the way they do, it’s always best to look to human emotions. The primary motivators in financial markets have always been fear and greed. Emotions so strong they can, on a regular basis, inflict extreme volatility into public markets. But markets forget. In the period since the great recession (2008-2009), the Federal Reserve Bank had invested so much liquidity into financial markets that most volatility (and with it, most fear and greed) had dissipated. Most investors should probably be forgiven for having taken low volatility for granted, but with the Fed’s posture reversed during 2018, volatility would return and once again fear and greed would dominate the direction of markets. 

Greed was the primary emotion affecting stocks at the beginning of the year. The desire to make money while “the getting was good” was strong in the first quarter, especially in the technology sector. A growing lust for the FANG stocks (Facebook, Apple, Netflix and Google) propelled a very small and select number of stocks higher and higher. On the opposite side of that trade, blue chip equities, even those with strong dividends, were in full fledge retreat as investors abandoned them to buy even more technology stocks. Just like the Y2K tech boom/bust, greed was concentrating more and more money into just one sector. It wouldn’t end well.

During the fourth quarter fear would take hold of investors. Concerns about rising interest rates, slowing earnings growth, foreign trade issues and a government shutdown changed investor behavior (individuals not so much, but institutions and their computers more so), which led the stock market to record sharp declines in December. The worst performing stocks were largely the very same technology issues that had led the market higher in February. By the end of the month an entire year’s worth of gains had been given up and then some for most investors.

Beyond fear and greed, equally hurtful from my perspective was the level of self-loathing among so many in the industry, as well as the TV and electric media personalities that used December’s decline to collect higher ratings by dispensing financial buffoonery. To listen to most pundits (feel free to take your pick): capitalism is broken, the President’s a fool, the Federal Reserve Chairman’s a moron, active investors and electronic trading are wrecking markets, passive investors and exchange traded mutual funds are wrecking markets. Tax cuts are needed. Taxes need to be raised. Deficits are the problem, Deficit spending is needed to save us.

Not a helpful word was spoken. Couldn’t anyone just say what the decline was - a correction? They happen almost every year… and will continue to do so as long as people continue to be influenced by fear and greed.