A Ray of Hope!
The surge in COVID-19 infection due to the holiday season and the uncertainty of more stimulus from the federal government will keep the economic recovery uneven for the foreseeable future. Hopefully, the change in administration is a ray of hope for our country.
The impact of efforts to contain the coronavirus's spread was evidently not effective entering 2021. An infection rate in California surged to record levels. Los Angeles County infection rate is at 20.1%, and the hospitalization capacity near zero. We continue to see persistently elevated unemployment applications, restaurant closings, and further consumer spending deterioration. According to Bloomberg, we lost 146,000 jobs in the last week.
How did we get here? We got here because of the psychology of human misjudgment. Humans develop simple mental models, and we continue to use them even if they lead us into dysfunctional tendencies-i.e. make bad decisions.
The first human misjudgment was electing a president who had the hammer and nail syndrome. You give a person a hammer, and they treat every problem like a nail. President Trump's hammer is lies, misinformation, self-interest. He kept lying and creating misinformation about the virus to protect his image of being in control and hoping to help his re-election dream.
His administration was driven by Trump's reward and punishment style. Vice President Pence and the president's cabinet did not want to tell the Emporer had no clothes. They were afraid of losing their jobs and keeping right standing with their leader. The authority influence tendency is another example of not speaking truth to power. In operating an aircraft, the pilot is the authority figure. During the flight simulator training, pilots randomly face crises. They have the pilot do something wrong where an idiot co-pilot would know the plane will crash. Still, the pilot keeps doing it, and the co-pilot is sitting there. The pilot is the authority figure, so the co-pilot does not challenge his authority figure. Guess what? The plane crashes. Trump's co-pilots let him crash the economy and let happen hundreds of thousands of preventable deaths.
The third misjudgment is pain avoiding psychological denial. One should recognize reality even when one doesn't like the truth. The Trump administration and the Senate majority denied the coronavirus threat. The fact is too painful to bear, so you distort it until it's bearable. Let's not talk about the problem. It may go away by itself in the Spring.
The result is what Charles Munger (partner of Warren Buffett) calls the Lollapalooza Effect. Suddenly all these psychological misjudgments come together. The product is the Lollapalooza effect: record unemployment, millions infected with coronavirus, business failures, 350,000 plus deaths, and the political insurrection.
I see signs of hope. For example, the Biden administration is not happy with the present vaccine rollout. Instead of taking a hammer, they decided to take a drill to dig deeper into the problem. Guess what? Let's not hold back the vaccine supply and try to get as many people vaccinated as soon as possible, so at least the high-risk population has some protection. There are signs of hope.
I am trying to show we humans are subject to psychological misjudgments that can lead to enormous consequences if we are not aware of our shortcomings. I include myself.
THE STOCK MARKET
The latest AAII Sentiment Survey reports one out of five individual investors remains neutral on the market. Meanwhile, Optimism is back at an unusually high level. Bullish sentiment, expectations that stock prices will rise over the next six months, jumped 8.0 percentage points to 54.0%. Optimism was last higher on November 11, 2020 (55.8%). The increase keeps bullish sentiment above its historical average of 38.0% for the ninth consecutive week.
This week the CNN Fear/Greed index indicates greed level remains the same. My review of the Morningstar top 33 undervalued stocks proved none worthy of investing in. Also, my study of the top 15 Vanguard mutual funds indicates high-risk levels for my clients. The financial media shows signs of herd mentality, often promoting high returns of Tesla and tech giants like Amazon, Facebook, and Google. Humans have a natural tendency to follow a herd of other humans. We do not have unlimited time and complete information, so we tend to copy other humans' behavior. We follow the pack, and sometimes we follow them off the edge of a cliff.
So I remain very cautious about adding more money into the market. As Ben Graham once said, "to be a good investor is a marriage between not following the crowd and a calculator."
Next week I will not publish my blog. I will be watching the inauguration and monitoring the stock market. Plus, I will be adding a section to my website on how to select mutual funds for beginning investors.
Please be safe. Wear a mask, keep your distance, and wash your handles. Also, be diligent in your surroundings next week, given what happened last week in Washington, D.C.
P.S. That stimulus check that you received or about to receive is not taxable according to the AARP.