Market Insight

Investors are often caught up in the quandary of perspective. Is my time frame too long or too short? How long will the current factors influencing the financial markets be in effect? If the government enacts certain policies or laws, are they good or bad for the markets or will they eventually be changed? Our perspective on the world around us is heavily influenced by recent events and activities. The “Recency Bias” causes individuals to overemphasize recent events when making decisions even when more dependable historical information is available. We introduce this concept to explain why some investors may quickly change course based on recent information and alter the prevailing path. By severely altering a path, resounding messages may be sent.

In fact, this is what has occurred with the equity markets of late. Investors knew the Trump administration would likely achieve only a portion of their tariff objectives. The stock market’s waterfall 20% correction sent no message to the administration about the policy itself, but it did suggest that both the time frame, and magnitude of this pursuit was destabilizing. The administration heard the resounding message and quickly altered their stance. A V-shaped recovery typical of event-driven, waterfall sell-offs developed as investors embraced the reversal and moved the markets back to pre-tariff levels. Our observations three months ago led us to state that, while the current environment is full of heightened uncertainty, we do not think it is permanent. The financial markets are perhaps one of the most powerful forces influencing politics today.