Emotion, not fundamentals, is driving stock gains, and a recession could send stocks down more than 30%, market vet says (2024)

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Emotion, not fundamentals, is driving stock gains, and a recession could send stocks down more than 30%, market vet says? ›

The stock market is being driven not by fundamentals, but by investor emotion and the fear of missing out — and a recession could send the S&P 500 plunging by as much as 30%. That's according to Paul Dietrich, the chief investment strategist of B.

While selling stocks during a market downturn might make you feel better temporarily, doing so reactively because stocks are tumbling isn't a good long-term investment strategy. Volatility is a normal part of investing in the stock market, so occasional market selloffs should be expected.

Market cycle of emotions

When fear starts to set in, market returns turn negative and eventually bottom out when investors are fearful. This cycle repeat itself as optimism starts to take over again.

And, if prices start to rise, you'll end up buying more shares at the lower prices and fewer shares when your favorite stocks start to get more expensive. In a nutshell, a recession can be a great time to buy the stocks of top-notch businesses at favorable prices.

Key Takeaways. During a recession, most investors should avoid investing in companies that are highly leveraged, cyclical, or speculative, as these companies pose the biggest risk of doing poorly during tough economic times.

A stock fund, either an ETF or a mutual fund, is a great way to invest during a recession. A fund tends to be less volatile than a portfolio of a few stocks, and investors are wagering less on any single stock than they are on the economy's return and a rise in market sentiment.

Saving Accounts

Like checking accounts, they're federally insured and are generally the simplest and safest place to keep cash in good times and bad. Other advantages of savings accounts include: Simple to open and maintain. Deposits are fully insured.

Having an investment plan and sticking to it is the best course of action to avoid the sway of emotion in trading. Passive index investing, diversification, and dollar-cost averaging are all fairly easy ways to maintain objectivity.

The stock market is being driven not by fundamentals, but by investor emotion and the fear of missing out — and a recession could send the S&P 500 plunging by as much as 30%. That's according to Paul Dietrich, the chief investment strategist of B.

Trading with emotions could lead to cognitive biases, impulsive decision-making, and loss aversion, all of which can adversely affect trading performance.

What does Warren Buffett say about stock market? ›

In Warren Buffet's annual letter to Berkshire Hathaway investors, Buffett compared today's stock market to a casino, with investors buying and selling rapidly in the hopes of winning big. “For whatever reasons, markets now exhibit far more casino-like behavior than they did when I was young,” he wrote.

Because a decline in disposable income affects prices, the prices of essentials, such as food and utilities, often stay the same. In contrast, things considered to be wants instead of needs, such as travel and entertainment, may be more likely to get cheaper.

In some cases—particularly if you have a longer investment horizon that will give your assets time to recover from any losses during the recession—you may benefit from leaving your portfolio alone.

During an economic downturn, it's crucial to control your spending. Try to avoid taking on new debt you don't need, like a house or car. Look critically at smaller expenses, too — there's no reason to keep paying for things you don't use.

Historically, consumer staples, health care and utilities stocks tend to weather recessions better than other sectors.

Don't: Take On High-Interest Debt

It's best to avoid racking up high-interest debt during a recession. In fact, the smart move is to slash high-interest debt so you've got more cash on hand. Chances are your highest-interest debt is credit card debt.

Losses aren't real until you sell. Some investors believe that by selling during a downturn, they can wait out difficult market conditions and reinvest when the market looks better. However, timing the market is extremely difficult, and even professionals who attempt to do this fail more often than not.

When the stock market is in free fall, holding cash helps you avoid further losses. Even if the stock market doesn't drop on a particular day, there is always the potential that it could have fallen—or will tomorrow. This possibility is known as systematic risk, and it can be completely avoided by holding cash.

The 3–5–7 rule in trading is a risk management principle that suggests allocating a certain percentage of your trading capital to different trades based on their risk levels. Here's how it typically works: 3% Rule: This suggests risking no more than 3% of your trading capital on any single trade.

When To Sell And Take A Loss. According to IBD founder William O'Neil's rule in "How to Make Money in Stocks," you should sell a stock when you are down 7% or 8% from your purchase price, no exceptions.