Animal Spirits
Question: The term Animal Spirits has been in the news recently. Can you explain what this means?
Answer: The expression Animal Spirts refers to emotions and instincts and how they influence behavior, and more specifically investor behavior. Following the Presidential Election, you may have heard the term used in connection with an upswing in markets, and specifically with the attention placed on Elon Musk and Tesla. Another factor driving activity could be attributed to FOMO (fear of missing out).
Animal Spirits isn’t a new term, it goes back to John Maynard Keynes’ book The General Theory of Employment, Interest and Money written in 1936. Keynes wrote that animal spirits, or emotional energy, influences investment decision making. Animal Spirits are driven by the underlying primal instincts of fear, hope, and greed.
Wall Street jargon is known for making references to animal personalities. Here are five well known animal analogies used on the Street:
Bulls charge ahead, are confident and optimistic. Bullish investors tend to rush in and easily buy stocks, sometime overlooking fundamentals and the fact that stocks fluctuate in value. Some say the term bull market refers to the fact that Bulls attack with their horns in an upward manner symbolizing upward prices.
Bears are cautious, sometimes grumpy, skeptical and expect the worst in situations. The term “bear market” is said allude to how Bears use their claws to swipe in a downward fashion, meaning the prices are going down. tend to flee towards safety and certainty.
Wolves are known as sly hungry opportunists. As portrayed in the famous movie Wolf of Wall Street, wolves love chaos and volatility. These creatures are cleaver, cunning and enjoy taking risks with little or no concern for others.
Sheep display herd mentality following the crowd, buying, and selling when everyone else does. Sheep will end up with “buy high” and “sell low” results rather than the sought after winning strategy of “buy low” and “sell high.”
Owls are patient and wise. These creatures ignore the noise thereby understanding that discipline and striving for a long-term perspective is a helpful strategy.
During my Senior year of College, I was invited to spend a Week on Wall Street during our Spring Break. Alumni from our University hosted a group of Economics Majors to tour the New York Stock Exchange. The memory of walking into the bustling exchange for the first time was one filled with energy and shouting. Animal Spirits were prevalent, and the reason markets sometimes behave like a rollercoaster. Optimistic Bulls spared with pessimistic bears, buying, and selling securities trading amongst themselves on behalf of their clients. The emotions explain why people chase bubbles, panic, and occasionally make irrational decisions.
As an investor have you ever bought something because a friend or family member told you it was a hot stock, without knowing much else about the company? That’s FOMO (fear of missing out) at it’s best. No one wants to be left behind! We actually had an individual call in and ask to buy “XYZ” stock without even knowing the name of the company, let alone what they did! The same emotional behavior occurs on the downside as well. The prevalence of social media brings news to us 24/7 on our cell phones. Much of this news is negative and filled with doom and gloom leading causing investors to sell in a panic often times locking in temporary losses. Animal Spirits can turn a rational market into an irrational chaos.
Irrational Exuberance is the phrase coined by former Fed Chair Alan Greenspan; this is when investors’ optimism inflates prices to absurd levels. Think of the dot-com bubble, where companies with no profits were valued in the billions because the internet was the new revolution.
We can tame ourselves if we know our tendencies toward a specific animal behavior. Are you more optimistic and bullish about life in general, or pessimistic and closer to the bear market mentality? Managing our animal spirits is a step towards balance and rational behavior. Watching the market on a daily or hourly basis can cause emotions to run wild. Design and stick to a solid investment strategy rather than following the herd or letting emotions run wild. Even the scariest bear markets eventually gave way to bullish recoveries.
The financial world can be thrilling and unpredictable. This makes remaining grounded a desired trait for investors. Don’t enter the jungle alone, ask for help. Stay focused, ask for help, and plan accordingly.
The opinions expressed are those of the writer as of November 10, 2024, but not necessarily those of Raymond James & Associates, and subject to change at any time based on market conditions and other factors. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct. This is not a complete summary or statement of all available date necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and investors may incur a profit or a loss. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.
Certified Planner Board of Standards, Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, and CFP® (with plaque design) in the U.S., which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements. This article provided by Darcie Guerin, CFP®, First Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at (239)389-1041, email darcie.guerin@raymondjames.com Website: www.raymondjames.com/Darcie
