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Fear of a Market Downturn: A Self-fulfilling Prophecy

Keep telling someone they are funny and sooner or later they’ll believe it. Keep telling yourself your car is going to break down on the highway and sooner or later it will. The difference between the two: one you can control, the other you cannot.

Similarly, doom-and-gloomers (mostly pundits) tout a market downturn mainly because they want to be the first to call it. And sooner or later, it’s inevitable; in the natural order of things there will be a more synchronized downturn. Markets go up and markets go down. After 10 years, though, “softer” starts are expected.

Regrettably though, if the media hype of a market downturn or a recession drives the herd mentality into a tailspin, costly investing mistakes will be made.

Downturns don’t happen; they’re caused

Surprisingly, as a forward-looking, leading indicator and predictor of the economy, the stock market is an untrustworthy indicator of future economic activity.

So without getting too technical, know that when stock prices rise, investors feel wealthier and spend more, which results in expanding economic growth. Conversely, when stock prices fall, investors feel poorer and spend less, which results in contracting or slower economic growth. Three things to know:

  • Current stock prices reflect investors’ expectations about corporations’ future earnings potential
  • Profitability is directly linked to economic activity
  • Fluctuations in stock prices lead the direction of the economy

If the market hits new highs this year, there might only be lower prices at first, some contrarians say. According to The New York Times, analysts were ‘slicing’ their forecasts for how much big companies will earn in the months ahead. “Corporate profits are by no means a perfect proxy for the health of the United States economy, but they are a heavy influence over the direction of the stock market.”

But in ‘downturn panic,’ seldom talked about is human error and false signals, as in the 1987 crash, when stock prices falsely predicted the direction of the economy. Instead of recession, the economy expanded until the 1990s. Those who lost their cool also lost their money. (Source: Brad Comincioli, Ames Library, and Illinois Wesleyan University).

And lest we forget, algorithmic trading – human investors allowing computers to do it all – has been linked to market volatility (how much something moves). Their poorly defined or coded algorithms have caused “flash crashes” triggering hundreds of transactions in minutes, leading to millions of dollars lost simply to an error. So, stay calm; stay the course, and stay with your advisor’s recommendations. The good news is: Wall Street’s top stock pickers are expecting gains this year.

‘Breaking News’

There is an overabundance of financial news, so trust only reliable sources. Know that downturns and slowdowns are typical mechanisms of stock market temperament. Analysts and strategists “see” them coming, so to speak, and are hardly influenced by news sources that pump out stories like these:

– “The longest bull market in history is coming to an end in 2019, according to the pros handling Wall Street money clientele,” Reuters reported.

– “The world’s biggest economy performed strongly in 2018, with robust growth and unemployment at levels not seen for the best part of half a century. But it won’t last,” wrote Larry Elliott for The Guardian. He based his prediction partly on years ending in “9” which he says always brings upheaval.

– “A survey of 500 Wall Street wealth managers by Natixis in December showed that the majority felt that the longest bull market in history would come to an end in 2019,” CNN reported.

Optimism, not pessimism drives the market

The endless expectations of the ‘end of the bull market run’ have been astonishing.

Businesses who pull back their spending, which is part of the self-fulfilling prophecy, leads to inactivity while thinking about it, or “paralysis by analysis.”

Until the markets buy into more optimism, market pessimism will cause the self-fulfilling prophecy to come to fruition as consumers and companies lose confidence and slow their spending.

How does this affect you, and what should you do?

Save as much as you can in your retirement accounts and maintain your long-term perspective. Only those who know you and your individual situation are best qualified to address your questions and concerns about the health of your portfolio.

Hefren-Tillotson advisors provide that indispensable personal interaction whenever you need it. We believe all face-to-face meetings are significant. Many meetings are for advice and reassurance as a result of recent market events. You’ll always get experience and expertise, sound solutions and wisdom from Hefren-Tillotson. We strive to be recognized for our unrivaled combination of successful wealth management solutions and exceptional client service.

Contact us today and let’s get acquainted.

DISCLAIMER: Past performance does not predict future results. This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.

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