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Just the other week we got our first big surprise of the year; the failure of SVB and a few other banks. I believe the second big surprise of the year is the fact that investors haven’t panicked. In fact, the S&P 500 index is actually higher today than it was on March 10, when the FDIC took over SVB and all of this came to light.
So why haven’t investors panicked, especially given all the negative (and sometimes apocalyptic) headlines? Considering such a question is essential to understand investor behavior and improve our value to our clients.
No Panic or Just a Delayed Panic?
Let’s play a game in “antecedent foresight” (the opposite of prospective hindsight). Let’s say I told you on March 1st, with perfect knowledge and foresight, that within two weeks there would be a run on a few banks in the US, the FDIC would get involved and close them, and 167 year old Credit Suisse would also fail. What would you have guessed the market reaction would have been to that? Or better yet, what if you told your clients what was going to happen, what do you think they would have done? My guess – the vast majority (based upon perfect foreknowledge) would have gone to cash and prepared to buy at lower prices.
We can think of a lot of reasons as to why investors haven’t panicked (yet). Perhaps it was because of government intervention – guaranteeing all deposits. Or the financial backing/investments by big banks. Certainly those could play a role. But I believe the greatest reason that investors haven’t panicked is because the market hasn’t gone down.
Market Movements Drive Investor Emotions
If the market was down 15% from SVB’s collapse, it is highly likely that the current environment and sentiment would be much different. Advisors would be fielding lots of concerned inquiries from clients. Some of those inquiries would recall the Global Financial Crisis of 2008/2009 and discuss the desire to move to cash.
Because the market has remained relatively stable and flat (up somewhat), that signals to investors that this may not be a big deal. Whereas a selloff would signal a very big deal.
This is an important investment truth. The moods and views of long-term investors are greatly influenced by short-term market outcomes. And short-term market outcomes are driven mostly from investor emotions, which vary greatly. Thus, we may have a situation in which long-term investors make decisions based on the short-term emotions of others. No one would admit to that, but that is what actually happens. Market movements affect our moods and perspectives, and therefore have the potential to influence our decisions. We may be long-term investors, but we are human – which means we are influenced by short-term outcomes and stimuli.
Will the Panic Happen?
Will investors panic over the bank failures? Who knows – we would probably need the market to go down first. But we know that investors will panic over something in the future. I have always said the media is the investor’s worst enemy. But here we have investors remaining rational despite the noise of headlines. This teaches me that the headlines are effective when they confirm a movement in the market, but lose a lot of their punch without a corresponding market movement.
In other words, short-term market outcomes are the dominate signal to investors. Given that information, it tells advisors where our focus should be with investors. The more we can help them view short-term outcomes as random and the result of other people’s fleeting feelings, the more we can help them remain rational when all else go berserk.
Related: Happy New Week!