Fear appeal

Some people worry about a shock to the markets that will erase savings and investments or screw up their retirement. In fact, it paralyzes them.

What if Putin goes rogue and grabs Greenland? What if some loonie shoots Trump? What happens if the Big One sends LA into the Pacific? An Amazonian climate change emergency? Civil war following the 2020 Presidential election? What next if terrorists bring down the Internet, crash the power grid and freeze financial transactions? Or maybe China just dumps US Treasuries and undermines the global currency system? Is Hong Kong the trigger? Iran? Kim?

Well, life happens. Nothing’s predictable. But fortunately we have history to guide us.

It was one fine morning. Sun. Clear skies, cloudless and sparkling as I stood looking west through the plate glass window on the 65th floor over Bay Street. My meeting with a bank economist just finished and we headed for the elevator. Aboard the car we watched the TV news feed and learned some kind of plane had plowed into the WTC in New York twenty minutes earlier. Then, suddenly, another. Everything changed in the space of a few floors.

The elevator doors opened in the concourse level to a surreal scene. Hundreds of people were gathering in front of several giant screens that normally flashed inane commercials for Scotiabank. This time they showed pictures of the iconic towers burning. Gasps and tears. Shock and disbelief.

I climbed the stairs and emerged into the sun at King & Bay, in the womb of the bank towers. Police vehicles were screaming into the intersection. They mounted the curbs and parked on the sidewalks and plaza areas in front of the main entrances. I called Dorothy. She’d just seen people jumping to their televised deaths from the World Trade Centre towers. “I have no idea what this means,” I told her. “But I’m coming.”

It took little time on the morning of September 11th for stock exchange officials in New York to decide markets would not open that day. America was under attack. The enemy was shadowy, lurking anywhere. Within hours the skies were empty of planes, three thousand people were dead and an age of innocence over.

Markets hate uncertainty and investors fear the unknown. Nine Eleven delivered not only a massive shock, but panic at the potential scale of unraveling events. There was now a smoky hole where the heart of America’s financial establishment once beat. The vulnerability of modern life came into clear focus. A bunch of dirtbags from the desert had brought the emerald city to its knees. How could that be?

The New York stock market stayed closed until September 17th. Not since the dark days of 1933 had that happened. When trading resumed, the selling wouldn’t stop. The market fell 7.1% – equivalent to a crash of over 1,900 points today. At the end of the week the index had shed 14%. The S&P dropped 12%. Almost a trillion and a half dollars was gone. Airlines, banks and insurers were especially punished.

So what happened then?

America bounced back, as it always does. The economy was still there, after all. People still needed airplanes, mortgages and cars. The market losses were reversed, and a month after Nine Eleven all major US markets were back at pre-September 11 levels. Those who panicked and sold in a falling market lost. Buyers scored. Investors who took no action were unscathed.

Eighteen years later the world has changed. But not human nature. Greed and fear continue to move markets. People rush in to buy what’s going up (lately that’s been gold) and scramble to unload what falls. Because fear is the strongest emotion, it dominates retail investors. You can see it ripple through the steerage section of this blog daily, even as financial markets make new record highs – as they did last year and the one before. When it comes to being terrified of loss, apparently Millennials lead the way. Some people say that’s because of Nine Eleven.

History suggests there are some things you should expect. Chaos, change and events that scare the crap out of you are among them. That will be normal. But so will be markets that rise over time. In the last century they’ve grown 73% of the time. Every single correction or bear has been followed by a rally or a bull market. People who invested in a diversified way then forgot about it have done well. Market timers have usually perished. Those who thought it was different this time learned the hard way. It’s never different. Not even when airplanes turn into bombs and Wall Street blows up.

So turn off BNN. Stop reading the doomers and scaremongers. Quit cruising the chat rooms full of fear appeal. Don’t flatter yourself that you live in unique times. You don’t. Not even close.