The trade war still looms, and American election campaigns have barely begun. Nothing has really changed in the last little while. Yet individuals are seemingly redeploying their cash reserves into the markets or spending on consumer goods at record levels.
If nothing has changed, why then, are people more confident than they know they should be?
Don’t confuse brains with a bull market
Humphrey B. Neill
Before we get to the main points lets clarify some terms. If someone is a “bull” or is “bullish”, they believe that the market, a specific security, or industry is poised to rise.
The opposite of a bull is a bear. Bears or Bearish individuals believe that the market, a specific security, or industry is poised to decline.
So, with stock indexes at or near all-time highs, and the fact that we are in the midst of the longest bull run in recent history, why are people so bullish right now? Easy! FOMO!
Fear Of Missing Out (FOMO)
This is outlined in Maslow’s Hierarchy of needs. Before we can feel love or belonging, we must first have physiological needs and safety needs met. However, once we feel love and belonging we can progress on to Esteem and Self-Actualization.
Maslow’s Hierarchy of Needs:
FOMO is often experienced in social settings. Not wanting to miss out on an outing or event, or if you have conflicting plans, it may cause anxiety because you want to attend both.
However, Fear of Missing Out can also be experienced in your financial life too. This is one of the main reasons lifestyle creep and other harmful financial habits form.
Note: stay tuned for a future blog post dedicated to lifestyle creep.
We don’t want to be left behind, that’s normal. However, jeopardizing our financial future to get “potential” gains is unwise.
Cash is Being Redeployed
When Bank of America Merrill Lynch conducted a survey they found that Portfolio Managers (PMs) are afraid of missing out on any stock market gains. This is peculiar since most PMs were worried all summer about an impending recession.
The survey found that cash levels posted there largest decline since President Trump’s Election in 2016. Cash on hand now dropped to 4.2% from 5%. This is the lowest cash on hand has been since 2013.
Low cash on hand made sense in 2013. The economy had just recovered from the financial crisis with markets hovering around late 2007 levels. Things were still relatively cheap in comparison. However, now we have been on one of the longest bull market runs ever, year 10+, and things are not so cheap anymore.
Nonetheless, people’s FOMO is getting the best of them and they are redeploying their cash when the stock market is at its highest level.
Just look at a screenshot from the daily updated CNN Fear and Greed Index:
How does it make sense that people are in a state of “Extreme Greed” during a time with so much economic uncertainty?
Bears on the Horizon?
Although a lot of cash has been redeployed, the economic outlook of many is quite bleak. The majority of people believe that there will be a significant correction by the end of 2020. Furthermore, more than 4/5 people believe volatility will increase.
With most believing the economic outlook is quite bleak, it seems counterproductive to redeploy cash reserves. This seems to be the outlook of one of the most influential money managers around, Warren Buffet.
Warren Buffet’s company, Berkshire Hathaway is sitting on some of the largest cash reserves it has ever had. Near the end of the summer, they were sitting on more than $100 Billion in cash.
Yet, many who think that they are as smart as Warren Buffet are redeploying their cash. It seems a little backward.
To combat the bears and keep the “good economic times rolling” the federal reserve has been cutting interest rates. To see our take on why interest rate cuts won’t help read our post: Interest Rates: Cuts are Not the Answer
Don’t Compromise Your Cash Reserve
Do you have adequate cash reserves? Have you bought into the FOMO and compromised your emergency fund?
If you’ve topped up your investment account, or made large consumer purchases and depleted your cash reserve, we suggest you refocus and get back to healthy levels.
From a financial planning perspective, having a cash reserve is extremely important. We always suggest having at least 3 months living expenses in cash. However, if times are less promising or your job security is lower, 6+ months is probably more appropriate.
In times prior to a recession or economic downturn, having a cash reserve is of utmost importance. “Cash is King” is never more relevant than in a time of economic hardship.
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Disclaimer: This Forbes Wealth Blog is for informational purposes only and does not constitute financial, legal, or tax advice of any kind. Please consult your legal, accounting, tax, investment, banking, and life insurance professionals to get precise advice relating to your particular situation before acting upon any strategy
