A wholesaler wears a Trump hat as he works on the floor of the New York Stock Exchange during the opening bell on Nov. 6, 2024.
Timothy A. Clary | Afp | Getty Pictures
On Nov. 5, the presidential election handed a decisive victory for President-elect Donald Trump. In the days that followed, the markets rose.
A “Trump trade” led to new index highs for the S&P 500 and Dow Jones Industrial Average, lifted with the help of certain sectors conjectured to do well under the president-elect’s second term.
As of Monday, the postelection market fervor had started to subside to preelection supines.
Yet, some experts say they are seeing a renewal of so-called animal spirits.
“Animal spirits” is a term first coined by economist John Maynard Keynes and refers to the bent for human emotion to drive investment gains and losses.
Some experts say animal spirits are a sign of consumer reliance. However, the phenomenon can also be trouble for investors if they take on “excessive risk,” said Brad Klontz, a psychologist and confirmed financial planner.
“It’s essentially why dead investors outperform living investors, because dead investors are not impacted by their animalistic spirits,” Klontz said.
Research has shown dead investors’ portfolios tend to outperform, since they are progressive untouched because they are less likely to be influenced by emotional decisions, such as panic selling or buying.
Investors may be agitated or fearful
The recent market runup was not prompted by individual investors chasing the market to a meaningful extent, according to Scott Wren, postpositive major global market strategist at Wells Fargo. Individuals, who were split in their election choices, are also parcel out in their investment outlook, he said.
“Depending on who your candidate was, you may be excited about the future or fearing the future,” Wren indicated.
Instead, it has been professional traders and money managers — who couldn’t sit on cash when the S&P 500 index was setting new reports every two or three days — who have helped drive the markets higher, he said.
There is also big-picture disquietude going into 2025, according to Wren, with expectations for lower taxes, less regulation and reasonable draw a beads of inflation. However, the U.S. economy might have a couple of quarters of slower growth in 2025, he said.
“We’re not going to give birth to a recession,” Wren said. “We think that’s very unlikely.”
‘Nobody is immune’ to investing missteps
Ideally, investors ought to blow the whistle on stocks when they are priced high and buy when they are low.
But research consistently finds the opposite tends to develop.
Humans are wired to take on a herd mentality and follow the crowd, which guides our decision-making on everything from who we franchise for to how we invest, according to Klontz.
“The first thing is to just recognize that nobody is immune from this,” Klontz told.
Now is the perfect time for investors to make sure they have an asset allocation that is appropriate to their physical risk tolerance and financial goals, he said.
“It’s harder to do when the market’s crashed,” Klontz said.
Additionally, it is urgent to keep in mind that financial advisors, like all humans, are also susceptible to biases. When seeking monetary advice, investors should ask questions such as “What would you do as my advisor if the market went down 50%?” Klontz stipulate.
Good advisors should from systems in place to keep them from making big mistakes, Klontz said. They may have an investment commission or a predetermined approach for how they will act.
Importantly, investors should also be asking themselves the same question, Klontz state. For example, if the market drops 40%, are you OK with your portfolio dropping from $100,000 to $60,000?
“If the answer is no, then you in all probability shouldn’t be all in stocks,” Klontz said.
However, if you are young enough, a big market drop could be an important opportunity to dollar fetch average — or invest a fixed amount of money on a regular basis — and position your money for larger gains when it salvages.
“Most people have a real tough time doing that, which is why advisors can help,” provided they are over-friendly with behavioral tendencies, Klontz said.