Thinking Fast, and Slow

Most people have experienced that moment of confusion when someone from a younger generation uses a slang word or phrase that you don’t understand, and this is a near certainty if you have millennial children or grandchildren in your life. “FOMO” – or Fear Of Missing Out – is a popular one in the current cultural discourse that applies to securities markets as well.

Market narrative more commonly talks about the primary emotions of greed (in a rising market) and fear (in a falling market) that drive investor behavior. FOMO is the new version of greed, and it has developed amazing velocity in our hyper-connected world of hyper-productivity. No matter your generation, we all have a hard time turning away from new notifications on our phone. New information feels shiny and exciting, and we feel we have to act on it.

FOMO is the new version of greed, and it has developed amazing velocity in our hyper-connected world of hyper-productivity.

Alongside our daily lives, this sense of urgency and anxiety has increased in the financial markets as well. In his book “Thinking Fast and Slow,” Daniel Kahneman[1] discusses the way we rely on instinctive thinking abilities much of the time, and make quick, emotional decisions. The fast and faster flow of information makes it harder to access our other mental capabilities – the ones that allow for more deliberative and logical thought.

Combining FOMO and instinctive thinking creates a potent mix and isn’t uncommon in investor behavior towards the end of a bull market – which is right where we stand today. That mix often makes for price volatility, and 2018 was no exception. After see-sawing up and down early in the year, US stocks grew steadily through September, but dramatic fourth-quarter declines dragged the full year into negative territory. Investors had become worried that the Fed was far too aggressive in raising interest rates, and that global growth was generally slowing – fear took over.

Prices recovered in the first quarter of this year, most significantly in response to the Fed’s reversal of intention regarding interest rates. Despite a big slowdown in the S&P earnings growth year over year, and a 20% drop from the third quarter’s peak level, investors have taken their cue from cautious optimism in several quarters – no more interest rate increases, some large IPOs ahead, possible resolution of the trade war with China – and instinctively taken action based on greed.

The Immediate Road Ahead

We are now entering the earnings season for the first quarter of 2019, and early indications are not promising. S&P 500 companies grew profits 20% in 2018 (compared with 2017) with the help of the corporate tax cut, according to FactSet. In 2019, however, analysts see profits growing just 3.7% year over year.2 Dozens of companies have already slashed their estimates coming into the second quarter. Many companies – Samsung, Apple, FedEx, 3M, Walgreens, and others – have given significant guidance about earnings, while others have revealed indicative data points, such as Tesla’s production slowdown. The slowdown in earnings growth for 2019 compared with 2018 may feel like using the emergency brake in your car.

In comparison, early earnings from financial services companies show fairly healthy profits from higher interest rates, despite the fact that the Fed’s recent pause will slow down their profit growth going forward. Everyone dreads an inverted yield curve – when long term rates are lower than short term rates – and many investors worry that the Fed already raised short term rates too far. Still, the economy is moving positively, and calls for a possible recession have been pushed out to 2020.

Simply knowing that your emotions and gut reactions affect decision making gets you to a better understanding of yourself and your priorities.

Both revenue and earnings growth matters, of course, because stock valuations are all about what a company can accomplish over the course of its future growth. Closely watched, therefore, are each company’s statements about upcoming quarters, and their sense of their ability to continue to grow earnings. Dramatically and historically low interest rates have supported real corporate growth for ten years; will the impact of now higher rates bring that growth to a halt?

Remembering to Think Slow

Simply knowing that your emotions and gut reactions affect decision making gets you to a better understanding of yourself and your priorities. That, in turn, can create room for more deliberate financial decisions. We have a clear understanding that our priority for clients is to grow portfolio values over time, minimize volatility so that they can stay on track, and ensure that regular withdrawals are safe even in a market downturn. Our clients partner with us for the long term, and the long term is rightfully where our focus resides.

One area of current concern for us is high levels of corporate debt, now much higher on a percentage basis than at the peak of the stock market in 2007,3 with a concurrent drop in credit quality. The same low interest rates that have driven earnings growth have also led to higher borrowing by most companies. In particular, the decline in credit quality increases our concern about “invisible” risk in the market that could amplify downside volatility when it comes. The current market is not compensating our clients for this higher risk, so we have been methodically reducing our exposure to high yield debt over recent months.

On a more optimistic tone, we do actively look for growth opportunities for our clients’ portfolios. Even apparently negative macro themes – such as a slowdown in China’s growth due to the trade war, or the Fed’s change of course on interest rates – can help us decide what elements in your portfolio warrant emphasis. We currently have a slight emphasis on international and emerging market stocks in our client portfolios, have been increasing average bond maturities and adding to real estate exposure to take advantage of the flattening trajectory of interest rates.


This is a general assessment of client portfolios and does not reflect the specific circumstance of every client.

  1. [1] Kahneman, Daniel, Thinking Fast and Slow, New York: Farrar, Straus & Giroux, 2011.
  2. Wursthorn, Michael, “Expected Earnings Pullback Sets Up Big Test for Bull Market,” WSJ Updated April 7, 2019
  3. “Are We In A Corporate Debt Bubble?” Susan Lund of the McKinsey Global Institute, published in the World Economic Forum, 21 June
    2018. She cites the near tripling of corporate debt outstanding, while the GDP represented by those corporate borrowers has only doubled,
    thus increasing the average company’s debt load considerably.