As last year’s robust gains continued into the fourth quarter, financial analysts were using an explanatory term you might be more likely to hear from a shaman: animal spirits.1
They were using it to refer to the strong emotions that sometimes drive economic behavior, especially the herd mentality that seems to take over during periods of market volatility. The term was first used in this sense by British economist John Maynard Keynes in his foundational 1936 publication The General Theory of Employment, Interest, and Money.2
Carla Tardi writes for Investopedia, “Animal spirits represent the emotions of confidence, hope, fear, and pessimism, that can affect financial decision-making.” When spirits are low, they can hold back the market, when by all other measures it should be experiencing growth. Conversely, when spirits are high, they can fuel speculation in investments that have no discernable reason for growth.
A classic example of animal spirits in action is the dotcom bubble at the turn of the 21st century. With the internet seeming to offer unlimited possibilities, simply tacking “dotcom” onto the name of a company would dramatically increase its market value. The realization of this folly came in the form of a dramatic correction, especially in the new technology sector. The tech-heavy NASDAQ, which had seen a fivefold gain from 1995-2000, lost more than three quarters of its value over a six month period.3
Recently, we’ve seen what looks like so-called animal spirits in action when in early August the S&P 500 experienced a single day drop of nearly 3% on bad news from Japan. At that point, we were being bombarded with headlines predicting that decline was “just the beginning.” And, again, in November when the market spiked more than 2.5% the day after the presidential election. In neither case did the underlying fundamentals warrant such a significant and rapid reallocation of capital. But that’s how the broader market processes all the available information, including folks who may be panicking for no rational reason.
While noting the many references to animal spirits in recent financial headlines, investment writer Ben Carlson is hopeful that not everyone shares this irrational exuberance. “Once everybody is in the pool, I get a little nervous.” He says that he much prefers a bull market that climbs a “wall of worry.”
One might make the case that last year’s climb of more than 24% was up such a wall. Consumers were not happy with the economy nor particularly confident about their financial future.4 The biggest evidence of this was the election, which saw a switch of parties with the economy being a major factor.
Since volatility is a key contributing factor to the strong emotions which lead to irrational behavior, and 2025 is sure to have its share of tumultuous events, perhaps the one thing investors are guaranteed are periods where animal spirits will send the market up or down in the short-term.
Regardless of what kind of sentiment is driving the market over the short-term, the prudent investor will work with his or her fiduciary financial advisor to ensure their portfolio is designed for their specific circumstances and appropriate in a bear or bull market, rebalancing as necessary.
If you ever have any questions about your investments or retirement plans, please feel free to give me a call at 801-545-0696.
Regards,
Mark Lund
Stonecreek Wealth Advisors, Inc.
10421 South Jordan Gateway, Suite 600
South Jordan, UT 84095
Sources:
1. http://go.pardot.com/e/91522/-11-the-wall-of-worry-is-dead-/963pkm/2580534093/h/Z4JkSOJcUasbqFXFr9AZADC_R8t8x8x_7ahiYj1D2C8
2. http://go.pardot.com/e/91522/terms-a-animal-spirits-asp/963pkq/2580534093/h/Z4JkSOJcUasbqFXFr9AZADC_R8t8x8x_7ahiYj1D2C8
3. http://go.pardot.com/e/91522/is-monthly-newsletter-intm-pdf/963pkt/2580534093/h/Z4JkSOJcUasbqFXFr9AZADC_R8t8x8x_7ahiYj1D2C8
4. http://go.pardot.com/e/91522/-even-americans-171908928-html/963pkx/2580534093/h/Z4JkSOJcUasbqFXFr9AZADC_R8t8x8x_7ahiYj1D2C8
Disclosure: This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This material was prepared by Efficient Advisors, LLC (“EA’) for Mark Lund, Mark is a Fiduciary Financial Advisor in Utah. He is known as a Wealth Advisor, The 401k Advisor, Investor Coach, Financial Planner, Investment Advisor and author of The Effective Investor. Mark offers investment advisory services through Stonecreek Wealth Advisors, Inc. a fiduciary, independent, fee-only, Registered Investment Advisor firm providing investment management and retirement planning for individuals and 401k consulting for small businesses. Mark’s newsletter is called The Effective Investor Newsletter. Cities served in Utah are: Salt Lake City, Salt Lake County, Utah County, Park City, Murray City, West Jordan City, Sandy City, Draper City, South Jordan City, Provo City, Orem City, Lehi City, Highland City, Alpine City, American Fork City. The views expressed herein are exclusively those of Efficient Advisors, LLC (‘EA’), and are not meant as investment advice and are subject to change. All charts and graphs are presented for informational and analytical purposes only. No chart or graph is intended to be used as a guide to investing. EA portfolios may contain specific securities that have been mentioned herein. EA makes no claim as to the suitability of these securities. Past performance is not a guarantee of future performance. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. All opinions expressed herein are subject to change without notice. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. You should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Investing in any security involves certain systematic risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any unsystematic risks associated with particular investment styles or strategies.
