Here is an article written by Eileen Ambrose of the Baltimore Sun that features some comments from me. Essentially, Eileen talked with Andrew Lo, a professor at MIT, where he compared investors’ behavior with the five stages of grief. He believes we are in the fourth stage of depression. Next, he believes acceptance will follow.
While his analysis is interesting, I see a different dynamic among investors, which was briefly detailed in the article. I think it is more fatigue, and it expands beyond the 2008 downturn. It goes back to 2000. We have had two grizzly bear markets in a short time frame that is weighing on investors. Even worse, economic conditions are worse today than before either of those bear markets if you look at employment, lending, housing prices, etc.
Part of the fatigue stems from investor behaviors. Many investors were too aggressive in 1999 and 2000, and they got murdered by the markets. Many capitulated and went to cash in 2002 or 2003 just to see the market rise dramatically. Once they reentered the markets, we got 2008. A large percentage of these investors were “advised” by planners so they have zero trust in the system.
While I think Professor Lo’s thesis is interesting, I don’t think he has quite addressed the entire landscape. I also fear that the next few years will see more roller coaster markets. Eventually, investors will no longer even think about equities and valuations will reset to secular lows. Then it will be the time to invest and feel the market’s tailwind.