Tyler Mordy explains why investor response to the market environment could be described as unusual
Investor response to what has been a multi-year bull market could be described as unusual. Markets have soared and yet the response from investors has been strangely muted. Volatility and turnover have been and trading volumes have actually declined – the only time in history volumes haven’t increased in a bull market. But why exactly have investors responded in such a manner?
“Behavioral psychologists would point to 2008’s global financial crisis and, since then, the lingering presence of what they call recency bias — the greater weight that recent experience can have on our decision making,” says Tyler Mordy, President & CIO at Forstrong Global. “The effect is even more powerful when recency is combined with salience — the more something means to you the more vivid your recollection of the event.”
Since 2009, many investors overestimated the probability of a recurrence of a financial meltdown, which goes some way to explaining the broad apathy toward stock markets. However, the tide does seem to be finally turning and there is solid evidence that lingering risk aversion is fading as the global economy gains more traction. Risk appetites are now returning with zeal, and rightly so, says Mordy.
“The record breaking streak of gains in global stock markets in 2017 has been supported by the broadest global growth in a decade,” Mordy says. “For the first time since 2008, all 45 of the largest economies tracked by the OECD have been in a synchronized expansion. That economic momentum has lifted earnings per share for global corporations above $30, a level first reached about 10 years ago.”
Mordy expects the next phase of the global recovery will close the wide cyclical gap that has opened up between the US and the rest of the world when the US started recovering almost immediately in 2009.
Many other economies were stuck in grinding recessions and are now only starting to liftoff, which indicates the current bull market still has a long way to run. “But with enthusiasm for risk-taking finally making a comeback, expectations have become higher,” Mordy says. “That means this next growth stage in the post-crisis period will need to provide an encore with even more lively entertainment: robust momentum and profit growth will need to show up quarter after quarter. Otherwise, many investors will just shrug and respond with an “oh well, whatever, nevermind”.
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