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I'm a long term (15y+), mostly passive investor.

I find the current situation of the financial market somewhat absurd, especially the fear of a recession that seems a self-fulfilling prophecy.

Since the 2008 crisis and the recent "mini-crash" (December 2018), central banks and investors alike seem to have gone bonkers: tweets from Trump make stock markets in the whole world go down, ambiguous words make speculators frenetic, bad economic indicators (German industry) and political issues (Brexit) make stocks go down before the economy effectively slows down

It is as if the fear of a recession make the stock market go into recession before it actually happens. So isn't it now a good moment to invest in 'fundamentally good', very large cap companies? The biggest difference I see with previous recessions is the fear, rather than blind optimism. Few were expecting crashes in 2008 or in previous recessions; but doesn't the consensus seem the opposite now? Unless we are in very long term bear market (10y+), which does not invalidate long-term DCA.

Note: I'm not asking for investment advice per se, as my plan is already fixed (monthly DCA / ETFs). I just want to know if my arguments make some sense in what seems an irrational market. My goal is to live off dividends in the future, anyway.

closed as primarily opinion-based by Dheer, Chris W. Rea, Vicky, JoeTaxpayer Aug 24 at 20:45

Many good questions generate some degree of opinion based on expert experience, but answers to this question will tend to be almost entirely based on opinions, rather than facts, references, or specific expertise. If this question can be reworded to fit the rules in the help center, please edit the question.

  • Please see money.stackexchange.com/help/on-topic. Notice "Investing and trading strategies, including fundamental and technical analysis and other techniques, as practiced by retail traders and investors. (again excluding specific recommendations and evaluation of conditions)". What you're asking is considered "evaluation of conditions." – Chris W. Rea Aug 24 at 17:04
  • Misc: Can you source which of the previous recessions were caused by self fulfilling prophecies? 2008 wasn't a crash. Tweets don't make markets drop - the content of the tweets does (policy change like yesterday's announcement of increased tariffs on 9/01?). The stock market is forward looking and it almost always goes down well before a recession. – Bob Baerker Aug 24 at 17:26
  • @BobBaerker I mean that the current market and banks seems more fearful (or careful?) than in 2008. I was wondering if that is only an impression. The prophecy part comes whether the reactions to news / anticipation of the recession may either be the tipping point eventually causing the recession. Not sure how to clarify my question any further. – Adr Aug 24 at 17:59
  • If you use point drop as a measure of fear, consider this. Yesterday the DJIA dropped 623 points or 2.37%. A bad day. Let's use 2% down as a threshold. There have been 5 such days this year with the worst one occurring last week, down 809 points or 3.07%. In 2008, there were 40 such days. On 9 of them, the DJIA dropped more than 5%. I think that your memory of 2008 has softened with time. As for self fulfilling, I do not believe that talk causes recessions. People spend because they can or because they have to. Consumer spending contracts when the working hours get cut and jobs are lost. – Bob Baerker Aug 24 at 18:40
  • @BobBaerker Why do you say 2008 is not a crash? From Oct 2007 to Mar 2008 the market dropped by 43% and in 2008 alone, by 38%. Are you just using a definition of crash that requires it to happen over at least X months? – Money Ann Aug 24 at 18:42
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You've understood part of the picture of value investing, but there are a few other important parts. This is why your premise is true (fear creates buying opportunities) but your conclusion does not follow (right now may or may not be a good time to invest).

Let's start with the facts: The market lately has hit record after record (S&P at 3025 on Jul 26). It has also been rising faster in the last few years than the "normal" rate of 7-10%. P/E ratios have also been at historic highs. Does this sound like bull hysteria, or bear hysteria to you? I think the market is more likely overvalued than undervalued right now - of course we have no way of knowing whether it will become even more overvalued tomorrow or crash. But if the trend currently is up, not down. (NB: As I write this, there is a small downturn over the last few weeks, but many such downturns have occurred this year and reversed promptly. I assume that this year will close in the green.)

Regarding your strategy: You should not base your investment decisions purely on what you read in the media. This is called "sentiment analysis" and big traders already do it on a huge scale, scanning all of the worlds news with advanced algorithms and armies of analysts and making the best trades based on it. The profit has all been arbitraged away, it is irrational to believe that you can compete as an individual. Furthermore, question the quality of the news you consume: Often the media skews issues and reports with political bias, because this helps sell papers, but it also distorts your feeling of market sentiment.

Lastly, about going into a recession before the recession: The market reflects the aggregate opinion of traders about the future. This is often very accurate and much more so than any individual's prediction. However it is not a sure bet. In the past, markets have experienced fear and crashed anyway many times. The market does a great job of resolving all the different known factors, but there are always unknown factors. For example, the probability of extreme events was famously underestimated before 1987. You cannot simply say the market fears a recession, therefore the recession will not be as bad as is feared. It may be exactly as bad as everyone fears, or it may be even worse. Unless you have a good way of quantifying fear and probability of that fear coming true, you can't really make a serious investment based on this "logic".

  • Thanks for the clarifications. About unexpected factors, I think that the only ones that can react properly to them are institutional investors that respond lightning-fast to continuous streams of data, and only during trading hours. In other cases, technical analysis and whatnot do not work. Is that correct? – Adr Aug 24 at 19:32
  • @Adr No, neither is correct. Not all factors require split second response, it is possible to give trading orders or conduct analysis outside trading hours, and technical analysis can be done on longer timescales like a month or year. However, it's a deep and complicated topic, and you should read about it more before making conclusions. – Money Ann Aug 24 at 19:39

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