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We all know and love the old axiom that there are two emotions that drive markets – greed and fear.

We all know which one is in the driver’s seat now – and with a vengeance.

The “fear/greed” dichotomy is fine, as far as it goes. (I have a pet theory that there’s really only one emotion that’s ultimately at play, but let’s leave that for another Market Insight. Or maybe not.)

The problem with the “fear/greed” paradigm is that it doesn’t go far enough – it doesn’t delve into the specific varieties of fear or greed that are operative at any given moment.

It’s useful to look at the kind of fear that’s driving markets now and what distinguishes it from other, more garden-variety fears.

The first thing to do is look at the source: a new and deadly disease surrounded with a multitude of unknowns.

As I’ve written before, a rather lengthy period of time spent in newsrooms scrutinizing human behavior for various newspapers and newswires has left me with very few convictions, but one of them is that nothing scares people more than a new and highly contagious disease.

Unlike many of the things that are covered in media and through other channels, contagious diseases represent a potential risk to each and every one of us. And when a disease is new – HIV, Ebola, SARS, etc. – we don’t know how significant a threat it is.

The fear prompted by deadly new diseases combines many different “subfears” in varying ratios depending on the individual: fear of their own death and suffering, fear of their loved ones and friends suffering and dying, fear of the consequences of a potential epidemic for their community and way of life, fear of economic losses to name some of the key ones.

An atavistic belief that diseases have a cultural or ethnic identity also contaminates the new-disease fear complex for many.

Filter those fears through uncertainty, and what you have is a powerful and dangerous emotion.

This is the inherently irrational fear that’s been motivating the unprecedent selloffs in stocks and other risk-sensitive assets in recent days, among them the Australian and Canadian dollars and other currencies considered growth-sensitive due to their strong links to commodities.

You may object that, no, what’s motivating investors is a fear based on a rational assessment of potential losses. But I suspect that too has been absorbed into the primal, all-encompassing fear of the novel coronavirus and that’s what’s prompting investors to sell, to divest themselves of anything that might be tainted by COVID-19 in any and hunker down in the US dollar.

And, of course, the irrational fears expressed in the market become a self-fulfilling prophecy. As any student of George Soros knows, the actions of investors in a context like this are “reflexive,” meaning that they themselves alter and exacerbate the underlying situation they’re responding to. As panicky investors sell stocks, the stock market goes down, so they sell more… it becomes a feedback loop, or in more old-fashioned parlance a “vicious circle.”

There will, of course, be rallies in the fear-driven bear market in equities like Tuesday’s, but the underlying sentiment likely won’t change until there are clear signals the virus is abating.

The unknowns surrounding COVID-19 that make the fear of it more intense. There’s much we still don’t know about, perhaps most importantly, we don’t know how bad it’s going to get.

It’s like we’re in the middle of a horror movie. The smart teenagers have convinced the not-so-smart ones that something evil is afoot, that a monster or serial killer is stalking them, but they haven’t seen it yet. They don’t know how deadly it is, and how to combat it.

That’s why people react so much more fearfully and irrationally to COVID19 than they do to the flu – it’s the devil we don’t know.

In many horror movies, the hero and his/her/their friends eventually discover what the monster. They sometimes even figure out how to defeat it – at least they did back when I used to watch horror movies.

We will collectively reach that point with COVID19. It will get worse before it gets better – at least from a North American perspective – but in the end we will defeat the coronavirus.

Franklin Quote

The toll, particularly on the vulnerable and the heroes on the frontlines of health care, will be likely dreadful, and the economic consequences will be dire. But we have the capability to ultimately win that battle, and even reduce the death and suffering by behaving appropriately – more on that below.

Succumbing to the panic that’s the terminal condition of coronavirus fear could complicate and delay that process.

All those years in all those newsrooms did leave me with one other conviction – panic is a terrible thing, in fact it’s one of the worst things there is.

Panic can debilitate you to the extent that you can’t take the steps you need to save yourself, even if you know full well what they are.

As an exceptionally wise man once famously said “We have nothing to fear but fear itself.”

That’s as relevant now as it was in World War II, when the combined effort of millions of people eventually overcame an evil that could have been much worse for the species than anything COVID19 throws at us.

So, don’t panic. Or stop panicking if you’ve already understandably succumbed. Instead, steel yourself to the task of understanding your enemy and taking the steps to defeat it.

None of this is news, of course, to the tiny coterie that has triumphed repeatedly in financial markets. If anyone has mastered the art of avoiding panic – of keeping their heads while all those around them are losing theirs – it’s the Warren Buffets of the world.

Emulate them. Avoid panic and pursue knowledge, another quintessential Buffet trait.

The panic over COVID19, for me at least, has been a powerful vindication of behavioral finance, the school of economics that acknowledges and explores how the irrational nooks and crannies of the human psyche affect economic behavior. Understanding the emotions that are motivating legions of frantic investors certainly puts you in a better position than those in the throes of panic.

So, I’ll conclude with some (likely unwanted) words of advice:




And spend some of your self-isolation time reading up on psychology, sociology and behavioral finance.

Best of Luck and Stay Safe and Healthy.


Don Curren
Market Strategist and Content Editor

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