Article written by Joe Wiggins, Director of Research at St. James’s Place
Last week, I asked ChatGPT the following question: “Between 2018 and today, can you tell me what the major financial market worry was for each quarter?” Here was the response:
2018
- Q1: Volmageddon as short volatility strategies implode.
- Q2: U.S.-China trade tensions intensify, sparking fears of a trade war.
- Q3: Tech sector concerns grow amid regulatory scrutiny.
- Q4: Fed tightening and growth slowdown fears cause a sharp market selloff.
2019
- Q1: U.S.-China trade deal uncertainty dominates headlines.
- Q2: Global bond yields fall as recession fears grow.
- Q3: Inverted yield curve raises alarm about a potential U.S. recession.
- Q4: Repo market turmoil raises concerns about liquidity in financial markets.
2020
- Q1: COVID-19 pandemic crashes markets, causing historic volatility.
- Q2: Fed and fiscal stimulus fuel a strong recovery in risk assets.
- Q3: Big Tech drives a narrow rally amid economic uncertainty.
- Q4: Vaccine rollouts drive optimism but second-wave fears persist.
2021
- Q1: GameStop short squeeze highlights retail trading power.
- Q2: Supply chain disruptions worsen, driving inflation concerns.
- Q3: China’s Evergrande crisis raises global financial stability worries.
- Q4: Fed signals faster tapering to address surging inflation.
2022
- Q1: Russia's invasion of Ukraine shocks energy and commodity markets.
- Q2: Central banks worldwide raise rates aggressively to combat inflation.
- Q3: Rising bond yields and U.S. dollar strength weigh on global markets.
- Q4: Fear of a global recession amid higher-for-longer interest rates.
2023
- Q1: U.S. regional banking crisis begins with the collapse of SVB.
- Q2: Debt ceiling standoff in the U.S. fuels market jitters.
- Q3: Rising bond yields pressure equity valuations and tech stocks.
- Q4: Geopolitical risks (e.g., Taiwan and Middle East tensions) dominate focus.
2024
- Q1: AI-driven growth optimism competes with concerns about peak interest rates.
- Q2: Central banks begin discussing rate cuts amid slower economic growth.
- Q3: Climate-related disasters intensify debates on green investments.
- Q4: Renewed geopolitical instability impacts energy and defense sectors
Reading through them all made me a little misty eyed about all the time spent in my career working on and worrying about issues that didn’t end up mattering that much (from an investment perspective, at least).
There is, however, a genuine problem here for investors. Financial markets tend to be an unstoppable conveyor belt of in-the-moment critical concerns that we cannot help but engage with, almost always in ways that are to our detriment.
It is human nature to be drawn towards things that are both salient and available. In financial markets, that means the more available (or prominent) an issue is, the more likely we are hugely overstate both its importance and the risk it presents.
Our engagement with this phenomenon typically works something like this:
Stage 1: A news story becomes the focus of investor / market attention.
Stage 2: We greatly overweight its long-term importance.
Stage 3: We develop ‘shallow expertise’ and a passable opinion on the subject.
Stage 4: We calculate our ‘exposure’ to the issue.
Stage 5: We inaccurately predict how financial markets will be impacted.
Stage 6: We either make a poor decision or have to justify not making one.
Stage 7: We move on to next in-the-spotlight news story.
Stage 8: We entirely forget what we said in Stage 1-6 within a few months.
It is hard to ignore something when everyone else is paying attention to it.
For any investor with a reasonably long time horizon, attempting to ignore whatever the market is focusing on at any given point in time is the sensible (and most lucrative) approach. Unfortunately, this can be close to impossible. For three reasons:
- It is hard to ignore something when everyone else is paying attention to it.
- We are human and thereby exposed to the same risk perception biases as everyone else. We must work exceptionally hard to behave differently.
- Sometimes something will matter to financial markets in a material way and ignoring it won’t look smart.
The issue of something ‘mattering’ is an important one. Most high-profile stories will move financial markets in some way, but that does not mean it should be important to us. It should only really matter to us if it has a predictable, fundamental impact on how we are invested over a time horizon that is relevant. For most sensibly diversified investors this should be an incredibly high hurdle.
If we are obsessing over short-term market fluctuations, it is critical to remember that these are predominantly the activities of investors with entirely different objectives to those that we have. They are talking a different language, one that we don’t need to be conversant in.
One way to help protect ourselves from being frequently dragged into the latest financial market fascination is to keep a log of what it is we are worrying about each month and what we think about it. Looking back on how often seemingly essential topics fade from view might just give us a slim hope of insulating ourselves in the future.
What has our gripped attention right now will probably matter just as much as that financial market fixation from last month and the one that arises next month. I can’t wait to find out what it is.
This article was first published on Joe Wiggins' Behavioural Investment blog. We would also like to draw your attention to his book "The Intelligent Fund Investor". The book examines the beliefs and behaviours that lead investors astray and shows how they can make better decisions. You can purchase a copy here.
