People love a good narrative, whether they’re reading a book, watching a movie, or trading stocks.
Yes, it’s true, markets may be rational over the long term.
But we don’t live in the long term. We live in the now. And it’s traders, investors, fund managers, and algorithms programmed by humans that drive markets in the here and now.
That means the psychological impact of a narrative – that one big idea that makes sense of everything that’s happening, even if it doesn’t account for every little market wiggle along the way – STILL drives markets more than the perfect rationale of robotic logic.
Traders, investors, and money managers are influenced by narratives just like the rest of us – even if they don’t know that’s what is driving their decision making.
Right now, the big idea that overshadows everything else is simple…
Markets have been fighting a battle for the past week, if not longer. And judging by the strong open this morning, we have a clear winner.
On one side we have coronavirus news that is as bad as it’s been since the spring. Hospitals in the Midwest are running out of beds, infections are soaring there and on the coasts. New York just announced that it will now require a negative Covid-19 test before allowing out-of-staters in, followed by a three-day quarantine and then another negative test. Hard to enforce, and sounds a bit like another lockdown.
In Europe, countries including the UK, France, Germany, Ireland, Italy, Belgium, Austria, Spain, and Portugal have or are about to go into another round of partial lockdowns, or something similar. Add to that the uncertainty about tomorrow’s U.S. election, and you can see why investors and traders might be skittish.
And yet markets are going up this morning. That’s because on the other side of this battle is a foe that has proven its strength over and over again this year.
I’m talking, of course, about the day-to-day fear of missing out, or FOMO.