The term “animal spirits” got tossed around of late to describe the market’s performance to start the year.
John Maynard Keynes coined the term actually. Here he is:
Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits — of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.
The argument is that the current “animal spirits” is due to the election. Maybe. Or people just got tired of being pessimistic.
This week marked the eight year anniversary of the 2009 bottom. It was rocky at points, but all uphill nonetheless. Each move higher brought a wave of bull market deniers proven wrong by a further move higher. It’s hard to maintain that type of doubt and pessimism while seeing opposing results.
Confidence plays an important role in the market’s mood swings. Too much and you get bubbles. Not enough and you get deep drawdowns. But it only takes a spark to pull markets out of a depression. Confidence is anti-gravity in markets.
Keynes elaborated further:
Enterprise only pretends to itself to be mainly actuated by the statements in its own prospectus, however candid and sincere. Only a little more than an expedition to the South Pole, is it based on an exact calculation of benefits to come. Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die; — though fears of loss may have a basis no more reasonable than hopes of profit had before.
It is safe to say that enterprise which depends on hopes stretching into the future benefits the community as a whole. But individual initiative will only be adequate when reasonable calculation is supplemented and supported by animal spirits, so that the thought of ultimate loss which often overtakes pioneers, as experience undoubtedly tells us and them, is put aside as a healthy man puts aside the expectation of death.
This means, unfortunately, not only that slumps and depressions are exaggerated in degree, but that economic prosperity is excessively dependent on a political and social atmosphere which is congenial to the average business man…In estimating the prospects of investment, we must have regard, therefore, to the nerves and hysteria and even the digestions and reactions to the weather of those upon whose spontaneous activity it largely depends.
We should not conclude from this that everything depends on waves of irrational psychology. On the contrary, the state of long-term expectation is often steady, and, even when it is not, the other factors exert their compensating effects. We are merely reminding ourselves that human decisions affecting the future, whether personal or political or economic, cannot depend on strict mathematical expectation, since the basis for making such calculations does not exist; and that it is our innate urge to activity which makes the wheels go round, our rational selves choosing between the alternatives as best we are able, calculating where we can, but often falling back for our motive on whim or sentiment or chance.
A balance of pessimism and optimism exists that tilts towards the idea that tomorrow will be better. You can see that in performance. Confidence in markets is the historical norm.
Keynes suggests that investors need to be aware of when that balance gets out of whack. Most of the time things are fine. A slight more optimism here or a little less there. That’s normal. The extremes are the periods to watch out for and be aware that it can pop up out of nowhere and move quickly.
And hopefully, not get caught up in it.
- Howard Marks on Global Markets – Bloomberg
- Buffett’s TV Interviews Are an Underappreciated Resource – Medium
- When Does the Water Get Hot? – S. Godin
- Let Me Convince You To Save Money – M. Housel
- How Long will the Bull Market Last – New Yorker
- The Hidden Risk of Low-Volatility Investing – Morningstar
- Top-Rated Credit Is Poised to Fall – L. Abramowicz
- When America Was Most Innovative, and Why – HBR
- The 100 Most Overpaid CEOs – Harvard Law
- The Invisible Force That Warps What You Read in the News – Backchannel
- Web of War – Aeon