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Markets in a Minute

The Psychological Pitfalls of a Market Cycle

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Investor Sentiment

This Markets in a Minute Chart is available as a poster.

The Psychological Pitfalls of a Market Cycle

When making investment decisions, investors have a wide variety of tools at their disposal.

For example, fundamental analysis can be used to estimate a stock’s intrinsic value. Technical analysis, on the other hand, requires an investor to analyze price movements to identify trends.

While these tools can form the basis of a sound investment thesis, their effectiveness is limited by one’s emotions. In today’s Markets in a Minute chart from New York Life Investments, we illustrate how sentiment can get in the way of rational decision making.

The Mentality of the Herd

Allowing emotions to dictate decisions is a common mistake made by many investors, yet they may not even realize it.

Herd mentality, which refers to an individual’s tendency to be influenced by his or her peers, often leads to heightened emotions and less rational decision making. In the context of investing, this tendency becomes particularly troublesome—market developments can be sensationalized in the media, by online blogs, or through word-of-mouth.

Mapping the Sentiment Cycle

Similar to how markets move in a series of patterns and cycles, the behavior of the investor herd tends to follow a continuous “sentiment cycle.”

1. Market Recovery
Today’s chart begins at the recovery stage of a market cycle, and assumes that emotional investors have recently suffered losses.

Although a support level has been clearly established, the herd is likely too afraid to act. Their fear of making another mistake causes them to miss the optimal window to re-enter the market.

2. Market Peak
Only after prices have substantially risen does the herd begin to take notice. Many of these investors will experience the fear of missing out (FOMO), and overzealously begin buying. Valuations at this point are likely no longer attractive.

3. Market Decline
What comes up must come down, and prices eventually peak as demand weakens. Investors who become too emotionally attached can find it difficult to cut their losses early.

4. Market Trough
By this point, the sentiment cycle has run a full course. Investors who followed the herd have likely sold at a loss, and will be reluctant to re-enter the market again.

Navigating Rough Waters

Investors are prone to falling into the sentiment cycle at any time, but especially when things get rough. So-called black swan events, such as the COVID-19 pandemic, can bring volatility to markets on short notice. In these situations, it’s common for investors to flock to safe-haven assets.

Since COVID-19 was classified as a global pandemic, money market funds have been in extremely high demand:

Money market flows

While this dramatic shift does have its merits—equity markets have seen deep selloffs—it may be a tad drastic. Governments around the world are making serious commitments to providing economic stimulus. In the U.S., the CARES Act amounts to a massive $2 trillion, and provides direct payments to families as well as support for both the private and public sector.

Keeping a Clear Mind

Now that we’ve outlined the psychological pitfalls of a market cycle, what can one do to break away from the herd?

A good start is becoming aware of the cognitive biases we commonly exhibit when investing. These biases can be linked to many of the emotions outlined in today’s chart. Finally, maintaining a growth mindset and learning from our past mistakes can also help us make better decisions in the future.

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Markets in a Minute

Visualizing the Three Different Types of Inflation

What are the different types of inflation? Which economic forces impact each type? Below, we chart each over modern history.

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Types of Inlfation

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Visualizing Three Types of Inflation

Inflation is dominating the news as prices hit 40-year highs.

While the price of everyday goods, including food and energy, is the most widely cited type of inflation, other forms exist across the broader economic system.

In this Markets in a Minute from New York Life Investments, we chart three types of inflation and the macroeconomic factors that influence each type.

1. Monetary Inflation

Monetary inflation occurs when the U.S. money supply increases over time. This represents both physical and digital money circulating in the economy including cash, checking accounts, and money market mutual funds.

The U.S. central bank typically influences the money supply by printing money, buying bonds, or changing bank reserve requirements. The central bank controls the money supply in order to boost the economy or tame inflation and keep prices stable.

Between 2020-2021, the money supply increased roughly 25%—a historic record—in response to the COVID-19 crisis. Since then, the Federal Reserve began tapering its bond purchases as the economy showed signs of strength.

YearMoney SupplyAnnual Percent Change
2022*$21.7T0.9%
2021$21.5T12.6%
2020$19.1T24.8%
2019$15.3T6.3%
2018$14.4T3.6%
2017$13.9T5.3%
2016$13.2T7.3%
2015$12.3T5.1%
2014$11.7T6.4%
2013$11.0T4.8%
2012$10.5T8.2%
2011$9.7T10.2%
2010$8.8T6.0%
2009$8.3T1.2%
2008$8.2T9.3%
2007$7.5T5.6%
2006$7.1T6.0%
2005$6.7T4.7%
2004$6.4T4.9%
2003$6.1T5.2%
2002$5.8T7.4%
2001$5.4T10.2%
2000$4.9T6.5%
1999$4.6T4.5%
1998$4.4T10.0%
1997$4.0T5.3%
1996$3.8T5.6%
1995$3.6T2.9%
1994$3.5T0.0%
1993$3.5T2.9%
1992$3.4T0.0%
1991$3.4T3.0%
1990$3.3T3.1%
1989$3.2T6.7%
1988$3.0T7.1%
1987$2.8T3.7%
1986$2.7T8.0%
1985$2.5T8.7%
1984$2.3T9.5%
1983$2.1T10.5%
1982$1.9T5.6%
1981$1.8T12.5%
1980$1.6T14.3%
1979$1.4T0.0%
1978$1.4T7.7%
1977$1.3T8.3%
1976$1.2T20.0%
1975$1.0T-99.9%
1974$902B5.4%
1973$856B6.7%
1972$802B13.0%
1971$710B13.2%
1970$627B6.6%

Indicated by the M2 Money Stock.
*Data as of April 2022.

It’s worth noting that, in theory, increasing the money supply faster than the growth in real output may cause consumer price inflation, especially if the velocity of money (speed at which money exchanges hands) is high. The reason is that there is more money chasing the same number of goods, and this eventually leads to increases in prices.

2. Consumer Price Inflation

Consumer price inflation occurs when the prices of goods and services increase. It is typically measured by the Consumer Price Index (CPI), which shows the average price increase of a basket of goods, such as food, clothing, and housing.

Supply chain issues, geopolitical events, monetary supply, and consumer demand may all affect consumer price inflation.

Rising 8.6% in May year-over-year, the CPI hit its highest level in four decades. Russia’s invasion of Ukraine and COVID-19 have caused extensive disruption in supply chains, from oil to wheat, leading to increased price pressures worldwide.

YearCPI Annual Percent Change
2022*8.6%
20214.7%
20201.2%
20191.8%
20182.4%
20172.1%
20161.3%
20150.1%
20141.6%
20131.5%
20122.1%
20113.2%
20101.6%
2009-0.4%
20083.8%
20072.9%
20063.2%
20053.4%
20042.7%
20032.3%
20021.6%
20012.8%
20003.4%
19992.2%
19981.6%
19972.3%
19962.9%
19952.8%
19942.6%
19933.0%
19923.0%
19914.2%
19905.4%
19894.8%
19884.1%
19873.7%
19861.9%
19853.5%
19844.3%
19833.2%
19826.1%
198110.3%
198013.5%
197911.3%
19787.6%
19776.5%
19765.7%
19759.1%
197411.1%
19736.2%
19723.3%
19714.3%
19705.8%
19695.5%
19684.3%
19672.8%
19663.0%
19651.6%
19641.3%
19631.2%
19621.2%
19611.1%
19601.5%
19591.0%
19582.7%
19573.3%
19561.5%
1955-0.3%
19540.3%
19530.8%
19522.3%
19517.9%
19501.1%
1949-1.0%
19487.7%
194714.4%
19468.5%
19452.3%
19441.6%
19436.0%
194210.9%
19415.1%
19400.7%
1939-1.3%
1938-2.0%
19373.7%
19361.0%
19352.6%
19343.5%
1933-5.2%
1932-10.3%
1931-8.9%
1930-2.7%

*Data for 2022 shows the year-over-year change from May 2021 to May 2022.

When consumer price inflation gets too heated, the central bank may increase interest rates to curtail spending and allow prices to cool down.

3. Asset-Price Inflation

Finally, asset-price inflation represents the price increase of stocks, bonds, real estate, and other financial assets over time. While there are a number of ways to show asset-price inflation, we will use household net worth as a percentage of GDP.

Often, a low interest rate climate creates a favorable environment for asset prices. This can be seen over the last decade as low borrowing costs were met with rising asset prices and strong investor confidence. In 2021, household net worth as a percentage of GDP stood at 620%.

YearU.S. Interest Rate Household Net Worth
as a % of GDP
20210.1%620%
20200.1%510%
20191.6%520%
20182.4%520%
20171.3%510%
20160.6%490%
20150.2%490%
20140.1%480%
20130.1%450%
20120.1%430%
20110.0%440%
20100.1%430%
20090.1%410%
20080.1%460%
20073.1%490%
20065.2%480%
20054.1%460%
20042.0%450%
20030.9%410%
20021.2%430%
20011.5%420%
20005.4%440%
19994.0%420%
19984.1%420%
19975.8%390%
19966.3%390%
19954.7%370%
19944.9%380%
19932.9%380%
19922.7%380%
19914.1%380%
19905.5%380%
19898.0%370%
19889.0%370%
19876.9%380%
198614.4%360%
198513.5%340%
19848.7%340%
19839.9%360%
198211.2%350%
198113.1%340%
198022.0%330%
197914.8%330%
197810.8%330%
19776.5%330%
19764.2%330%
19755.4%340%
19743.9%340%
19739.8%360%
19725.5%360%
19713.0%360%
19703.0%350%
19695.0%360%
19684.0%350%
19674.5%360%
19665.0%350%
19654.6%370%
19644.0%370%
19633.3%380%
19623.0%380%
19612.5%390%
19603.0%370%
19594.0%380%
19582.4%390%
19573.0%370%
19563.0%370%
19552.5%360%

Interest rates indicated by the Effective Federal Funds Rate

Sometimes rising asset prices can be a misleading sign of a strengthening economy since no real output is produced. Instead, this may indicate an asset bubble.

How the Types of Inflation Impact You

With monetary inflation, businesses and consumers have more money at their disposal, which could then boost demand and further increase inflation in the overall economy.

However, the degree that this impacts consumer price inflation can be unclear. Over the last decade, the money supply ballooned but consumer price inflation stayed relatively stable. Instead, supply shocks seen with COVID-19 and the invasion of Ukraine have had a more immediate effect. The effect of this scarcity in goods has made prices more sensitive to demand. This can be seen with gasoline prices at record highs.

When it comes to asset price inflation, a significant increase to the monetary supply and low interest rates are likely factors behind rising asset prices, among other variables. Yet as the Federal Reserve takes a more hawkish stance on monetary policy, the future of asset price inflation remains to be seen.

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Markets in a Minute

Mapped: Economic Predictions for 2022 and Beyond

Global GDP growth is forecast to drop from 6.1% in 2021 to 3.6% in 2022. This map shows economic predictions for 2022 and beyond by country.

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World map with countries coloured according to economic predictions for 2022

This infographic is available as a poster.

Economic Predictions for 2022 and Beyond

How resilient will countries be in 2022? Economies have to contend with commodity shortages related to the Russia-Ukraine war, supply chain issues due to lockdowns in China, and tightening monetary policy as inflation rises.

In light of these challenges, the International Monetary Fund (IMF) has lowered its economic predictions for 2022 and beyond. The IMF predicts that global GDP growth will slow from 6.1% in 2021 to 3.6% in 2022 and 2023.

In this Markets in a Minute from New York Life Investments, we explore GDP projections by country. It’s the second in a two-part series that explores GDP growth around the world.

GDP Forecasts by Country

Due to the war in Ukraine, the IMF notes that the economic predictions for 2022 and beyond have considerable uncertainty. The projections also assume that the conflict remains confined to Ukraine and that the pandemic’s health and economic consequences lessen during 2022.

Here are the IMF’s predictions for real GDP growth by country. Unsurprisingly, Ukraine will have the most severe contraction of -35% this year. Russia’s invasion has damaged or destroyed 30% of the nation’s infrastructure, and more than 14 million people have fled their homes.

Jurisdiction2022P2023P
Afghanistann/an/a
Albania2.0%2.8%
Algeria2.4%2.4%
Andorra4.5%2.7%
Angola3.0%3.3%
Antigua and Barbuda6.5%5.4%
Argentina4.0%3.0%
Armenia1.5%4.0%
Aruba2.7%3.7%
Australia4.2%2.5%
Austria2.6%3.0%
Azerbaijan2.8%2.6%
Bahrain3.3%3.0%
Bangladesh6.4%6.7%
Barbados11.2%4.9%
Belarus-6.4%0.4%
Belgium2.1%1.4%
Belize5.7%3.4%
Benin5.9%6.2%
Bhutan4.4%4.5%
Bolivia3.8%3.7%
Bosnia and Herzegovina2.5%2.3%
Botswana4.3%4.2%
Brazil0.8%1.4%
Brunei Darussalam5.8%2.6%
Bulgaria3.2%4.5%
Burkina Faso4.7%5.0%
Burundi3.6%4.6%
Cabo Verde5.2%5.8%
Cambodia5.1%5.9%
Cameroon4.3%4.9%
Canada3.9%2.8%
Central African Republic3.5%3.7%
Chad3.3%3.5%
Chile1.5%0.5%
China4.4%5.1%
Colombia5.8%3.6%
Comoros3.5%3.7%
Costa Rica3.3%3.1%
Croatia2.7%4.0%
Côte d'Ivoire6.0%6.7%
Cyprus2.1%3.5%
Czech Republic2.3%4.2%
Democratic Republic of the Congo6.4%6.9%
Denmark2.3%1.7%
Djibouti3.0%5.0%
Dominica6.8%5.0%
Dominican Republic5.5%5.0%
Ecuador2.9%2.7%
Egypt5.9%5.0%
El Salvador3.0%2.3%
Equatorial Guinea6.1%-2.9%
Eritrea4.7%3.6%
Estonia0.2%2.2%
Eswatini2.1%1.8%
Ethiopia3.8%5.7%
Fiji6.8%7.7%
Finland1.6%1.7%
France2.9%1.4%
Gabon2.7%3.4%
Georgia3.2%5.8%
Germany2.1%2.7%
Ghana5.2%5.1%
Greece3.5%2.6%
Grenada3.6%3.6%
Guatemala4.0%3.6%
Guinea4.8%5.8%
Guinea-Bissau3.8%4.5%
Guyana47.2%34.5%
Haiti0.3%1.4%
Honduras3.8%3.5%
Hong Kong SAR0.5%4.9%
Hungary3.7%3.6%
Iceland3.3%2.3%
India8.2%6.9%
Indonesia5.4%6.0%
Iraq9.5%5.7%
Ireland5.2%5.0%
Islamic Republic of Iran3.0%2.0%
Israel5.0%3.5%
Italy2.3%1.7%
Jamaica2.5%3.3%
Japan2.4%2.3%
Jordan2.4%3.1%
Kazakhstan2.3%4.4%
Kenya5.7%5.3%
Kiribati1.1%2.8%
Korea2.5%2.9%
Kosovo2.8%3.9%
Kuwait8.2%2.6%
Kyrgyz Republic0.9%5.0%
Lao P.D.R.3.2%3.5%
Latvia1.0%2.4%
Lebanonn/an/a
Lesotho3.1%1.6%
Liberia4.5%5.5%
Libya3.5%4.4%
Lithuania1.8%2.6%
Luxembourg1.8%2.1%
Macao SAR15.5%23.3%
Madagascar5.1%5.2%
Malawi2.7%4.3%
Malaysia5.6%5.5%
Maldives6.1%8.9%
Mali2.0%5.3%
Malta4.8%4.5%
Marshall Islands2.0%3.2%
Mauritania5.0%4.4%
Mauritius6.1%5.6%
Mexico2.0%2.5%
Micronesia-0.5%2.8%
Moldova0.3%2.0%
Mongolia2.0%7.0%
Montenegro3.8%4.2%
Morocco1.1%4.6%
Mozambique3.8%5.0%
Myanmar1.6%3.0%
Namibia2.8%3.7%
Nauru0.9%2.0%
Nepal4.1%6.1%
Netherlands3.0%2.0%
New Zealand2.7%2.6%
Nicaragua3.8%2.2%
Niger6.9%7.2%
Nigeria3.4%3.1%
North Macedonia3.2%2.7%
Norway4.0%2.6%
Oman5.6%2.7%
Pakistan4.0%4.2%
Palau8.1%18.8%
Panama7.5%5.0%
Papua New Guinea4.8%4.3%
Paraguay0.3%4.5%
Peru3.0%3.0%
Philippines6.5%6.3%
Poland3.7%2.9%
Portugal4.0%2.1%
Puerto Rico4.8%0.4%
Qatar3.4%2.5%
Republic of Congo2.4%2.7%
Romania2.2%3.4%
Russia-8.5%-2.3%
Rwanda6.4%7.4%
São Tomé and Prìncipe1.6%2.8%
Samoa0.0%4.0%
San Marino1.3%1.1%
Saudi Arabia7.6%3.6%
Senegal5.0%9.2%
Serbia3.5%4.0%
Seychelles4.6%5.6%
Sierra Leone3.4%4.3%
Singapore4.0%2.9%
Slovak Republic2.6%5.0%
Slovenia3.7%3.0%
Solomon Islands-4.0%3.2%
Somalia3.0%3.6%
South Africa1.9%1.4%
South Sudan6.5%5.6%
Spain4.8%3.3%
Sri Lanka2.6%2.7%
St. Kitts and Nevis10.0%4.7%
St. Lucia9.7%6.0%
St. Vincent and the Grenadines5.0%6.4%
Sudan0.3%3.9%
Suriname1.8%2.1%
Sweden2.9%2.7%
Switzerland2.2%1.4%
Syrian/an/a
Taiwan Province of China3.2%2.9%
Tajikistan2.5%3.5%
Tanzania4.8%5.2%
Thailand3.3%4.3%
The Bahamas6.0%4.1%
The Gambia5.6%6.2%
Timor-Leste2.0%3.6%
Togo5.6%6.2%
Tonga-1.7%3.0%
Trinidad and Tobago5.5%3.0%
Tunisia2.2%n/a
Turkey2.7%3.0%
Turkmenistan1.6%2.5%
Tuvalu3.0%3.5%
Uganda4.9%6.5%
Ukraine-35.0%n/a
United Arab Emirates4.2%3.8%
United Kingdom3.7%1.2%
United States3.7%2.3%
Uruguay3.9%3.0%
Uzbekistan3.4%5.0%
Vanuatu2.2%3.4%
Venezuela1.5%1.5%
Vietnam6.0%7.2%
West Bank and Gaza4.0%3.5%
Yemen1.0%2.5%
Zambia3.1%3.6%
Zimbabwe3.5%3.0%

Guyana, a country of less than 800,000 people in South America, is forecast to have the highest GDP growth of 47.2% in 2022 and 34.5% in 2023. The country has begun to rapidly develop its offshore oil industry, with oil earnings estimated to make up nearly 40% of its GDP.

In Asia, India is projected to see strong growth of 8.2% in 2022 and 6.9% in 2023. The growth is supported by government spending and economic reforms, such as lowering the corporate tax rate and allowing more foreign direct investment. In fact, foreign direct investment reached a record $84 billion in 2021-22.

Meanwhile, the IMF predicts that GDP growth in the U.S. will hit 3.7% in 2022 and 2.3% in 2023. The Russia-Ukraine war is expected to slow growth in America’s trading partners, reducing their demand for American goods. The central bank has also withdrawn U.S. monetary support faster than expected as rates rise to combat inflation. Even still, the IMF expects that the U.S. will reach its pre-pandemic trend output path by 2022.

Supporting Growth

Certainly, there are a number of risks facing the global economy. Countries with strong fiscal and monetary support, as well as countries with in-demand exports, have some of the best economic predictions for 2022 and beyond.

The IMF also offers countries various recommendations in order to support growth. For instance, central banks can offer clear interest rate guidance to minimize surprises that disrupt the markets. Governments can continue offering targeted fiscal support to vulnerable populations, such as refugees and households most impacted by the pandemic.

Over the longer-term, countries can focus on reskilling their workforce for the digital transformation, investing in renewables for the green transition, and improving the resiliency of global supply chains.

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