Investors reoriented themselves.

Navigating in the mountains can be a complicated task. Hikers can become disoriented when they run into overlapping ridges, overgrown trails, or unexpected weather. Knowing how to find your way to the right path is an invaluable skill. Last week, investors needed all their skills as they:

• Continued up the AI trail. Artificial intelligence (AI) is so new that investors often are traveling unexplored territory. Prior to the midterm elections, the Nasdaq Composite Index, which has significant exposure to AI-related companies, was near correction territory (down about 10 percent from a previous peak) and semiconductor stocks were in a bear market (down 20 percent from a previous peak), despite solid third-quarter earnings. Al Root of Barron’s explained,

“Clearly, investors are worried about AI—in particular the market’s ability to fund the trillion-dollar building cycle…Investors want to hear about 2027, and there is precious little formal guidance for the year ahead.”

• Welcomed certainty with a relief rally. On Wednesday, the pre-election fog lifted. John Towfighi and Matt Egan of CNN reported markets rose on optimism about an end to the war in Iran, as well as “the prospect of policy gridlock under a divided government, which can curb excess spending and create a more predictable outlook for markets. The VIX, which measures expectations for volatility, sank almost 20 percent.”

The Dow Jones Industrial Average, Standard & Poor’s 500 Index, and Nasdaq Composite Indexes experienced significant post-midterm election gains, according to a source cited by Towfighi and Egan.

• Checked their compasses. Investor optimism dissipated on Thursday. Major U.S. stock indexes gave back Wednesday’s gains and more, and the VIX surged higher. Ben Levisohn of Barron’s reported:

“The selling might seem extreme, but not when you consider how Wall Street works. Everyone has a financial model that projects growth in the years to come, which is ultimately used to derive a price target. With the Democrat sweep, however, all those growth targets have to be tossed in the rubbish bin. Investors now have to consider how quickly data centers can actually be built, and what that will mean for the companies selling products into the ecosystem.”

On Friday, the stock market experienced a modest rebound. Major U.S. stock indexes finished last week lower, although they remain in positive territory year-to-date. Yields on U.S. Treasuries moved lower over the week.

S&P 500, Dow Jones Global ex-US, S&P GSCI Gold Index, Bloomberg Commodity Index returns exclude reinvested dividends. The three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. 

Sources: Yahoo! Finance; MarketWatch; djindexes.com; U.S. Treasury.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

SEEING RED? You open an account statement, and it shows numbers in red. Before you’ve read a single line, your stomach tightens and your anxiety rises. That reaction isn’t a coincidence. Research shows that we react reflexively to the color red.

There’s a reason red evokes a strong response. We learn at an early age that red means stop or danger. It’s the color of stop signs, fire engines, and flashing police lights. Teachers use red pens to mark errors. Red is associated with danger, fear, and anger.

In stock markets around the world, red is used to indicate the direction of the market. In the United States, red means share prices are falling. In China, it’s the opposite. Red means stocks are rising. The color that means “down” in New York means “up” in Shanghai. That’s important because it shows that our response to red is learned. A color actually tells you nothing about your investments, but our brains react to it anyway.

In 2020, a group of researchers investigated how colors affect money decisions. They conducted eight experiments with more than 1,400 participants and found that showing information in red changed people’s reactions and expectations.

• Participants took less risk. Participants were asked to choose between high- and low-risk financial options. When potential financial losses were shown in red, they were about 20 percent less likely to pick the riskier option than when the possible losses were shown in black.
• Participants were less optimistic. Participants were shown stocks that had lost value over a 12-month period and asked what might happen next. When the losses were shown in red, they tended to expect prices to keep falling. When losses were shown in black or blue, many expected prices to recover. The data was the same, but the color changed the forecast.

We often take color for granted when reviewing financial information, and we shouldn’t. Our subconscious response to color has the potential to affect our decision-making. One strategy is to ignore color and review the numbers, along with the time frame. A brief negative return in a 10-year upward trend is still a 10-year upward trend. It works the other way, too.

Any time you have questions or concerns, please get in touch. We’re happy to review the numbers – no matter what color they are – and offer some perspective.

WEEKLY FOCUS – THINK ABOUT IT

“A thimbleful of red is redder than a bucketful.”

― Henri Matisse, Artist