The market activity of the last week has been nothing short of amazing. It wil, no doubt, provide fuel for several year's worth of analysis by investment psychologists. Consider these amazing facts...
1) The Debt Debate. For almost two weeks, the U.S. government debated spending measures to reduce the deficit. After they had reached an agreement, the markets crashed (see my earlier post, "The Market Gets Ugly," for a full explanation).
2) The Downgrade. Standard & Poors downgraded U.S. debt, meaning that S&P feels the probability of the government defaulting on its loan obligations is now higher. As a result of this downgrade and the subsequent market crash, investors... (wait for it, this is really good) bought hordes of U.S. treasuries! That is, they escaped the crisis of a U.S. debt downgrade by buying into the safety of U.S. debt.
3) Scapegoating and Fundamental Attribution Errors (forms of logical fallacy) in the media. Pundits are taking to the airwaves to say that the crash would never have happened, if only they been in power. This includes Sarah Palin and Donald Trump, whose opinions almost symbolize rhetoric over logic. Investors, demanding an explanation for what they cannot understand, are listening to anyone who seems to have one.
4) Ignoring Statistics. Just as they do on the upside, emotional investors are now completely ignoring fundamentals. There are many profitable companies in the U.S. that are once again trading at low single-digit P/E ratios! The average investor is looking at the equivalent of a $.10 slice of homemade apple pie and saying, "I'm sure not eating that s**t!"
I have to admit, I'm finding this all terribly fascinating. And I love buying stocks that others are throwing away.
Fear is here.
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"If stupidity got us into this mess, then why can't it get us out?"
Will Rogers
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