Market Volatility

You have probably been hearing a lot about China devaluing the Yuan and worries about the Fed raising interest rates in September as the cause of the recent market sell off.

In recent discussions with clients I have been referencing the chart above.  The chart shows that although the S&P 500 was recently only 3% below its high, there were 252 companies within that index that were greater than 10% below their own recent highs.  That number has only increased in August. 

My feeling is that the recent volatility in the market is a reflection of this.  The large names that were holding the index at higher levels (Apple to name one) have been losing value and the index may be on its way to more appropriately representing the value of the stocks that comprise it.

Please keep in mind that even with today’s sell off the market is only off 3.5% from its highs and this should not be a reason to panic.

Muni-Nation Halftime Perspective

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Muni-Nation Halftime Perspective

Biases of Social Interaction

My son was reading a book about the Civil Rights movement recently and he asked me what causes a group of people to act in a certain way?  It took me a while, but I related it back to my interest in Behavioral Finance.

The answer I gave him related to the biases of social interaction:

Herd Mentality or Bandwagon effect– Like other social animals, people tend to follow the behaviors and opinions of the majority to feel safer and avoid conflict.   If the majority of the group starts to move in one direction the others instinctively follow.  The Solomon Asch conformity experiments in the 1950’s demonstrated the degree to which an individual’s own opinions were influenced by those of a majority.

The biases of social interaction helped racism to permeate through the south for a long period of time.

These same biases also contribute to many of the bubbles that we have seen in the markets.  The tech bubble and the housing crisis went to extreme levels as more and more people heard of how much money everyone else was “making” and chased into the markets.

People have talked about the current stock market and asked if we are in a “Bubble?”  My answer is that we are still far from people “herding” into the market.  When I start to see that behavior, my opinion will change.