One of the most intriguing things I find about the market is how the collective psyche sometimes resembles a singular entity. In particular, I have been fascinated by the commentary we have heard from some quarters regarding deep and obvious flaws in the present macro environment. I spent a lot of time over the holidays (skeptically) reading commentary from various pundits. There was something strangely familiar in the absurdly erroneous observations, but I couldn’t place my finger on what it was.
Until Friday. I don’t know who or what actually triggered my memory, but it finally dawned on me what the parallel was: The Kübler-Ross model of 5 stages of grief.
For those of you who never took any psych in college, that is the process by which us humans deal with grief and tragedy. It was introduced by Elisabeth Kübler-Ross in her 1969 book "On Death and Dying". This has become well-known as the "Five Stages of Grief." They are:
Reviewing recent market commentary, it appears that the investors, traders and pundits alike have been working their way through each of these 5 stages. Consider:
1. Denial: For the longest time, the consensus was that Housing issues wouldn’t impact anything else. Classic denial was demonstrated by the insistence that first Housing, then the credit crunch, was "contained."
There has been a multi-step process for the deniers (denialists?). Initially, they insisted there was no housing slowdown. Then, any slowdown would not impact consumer spending or the broader economy. The 3rd denial step was that while it was no longer contained, any damage would be mild. The most recent denial was that while the Housing issue has been worse than previously believed, it is now fully reflected in stock prices.
Me thinks they doth protest too much.
We saw the same denial steps in inflation, consumer spending, and job creation. The denial transition went from: a) No slowdown; to b) Slowdown, but no impact; to c) Impact, but contained; to d) Broad impact already reflected in stock prices.
2. Anger: The details of this were personified by Jim Cramer’s now infamous Fed rant. After spending the prior year discussing that Housing was fine (February 2007), and pointing out each bounce in the home builders (November 2006) was proof the Housing bottom was in, Cramer’s incredible meltdown was stark evidence that the denial stage was over, and the classic anger stage was beginning.
3. Bargaining: I believe we are now at the bargaining stage. This is reflected in the increased expectations of a 50 bps rate cut (If the Fed cuts aggressively, stocks will be fine). Buying falling knives is a form of bargaining (If I avoid momentum plays and only buy cheap stocks, I’m okay).
Yet another example I’ve been seeing: "Invest Now in Anticipation of Recession Recovery."
What’s next? Well, steps 4 and 5 — Depression and Acceptance — have yet to occur this cycle.
If you were an active investor — or better yet, in the business, recall what your psyche was like in mid-2002. That was Step 4 – depression. The screens were red all day, investors refused to even open up their monthly statements, no one wanted to take your calls. It was fugly. That’s what depression is like.
Step 5 (Acceptance) was when people finally admitted it was over — that stocks had their day. Hope was extinguished, and perhaps real estate or commodities might be a better play. Incidentally, stage 5 is a great time to buy equities.
If this parallel to Kübler-Ross continues to hold, and if my approximation that we are only at stage 3 is correct — then we have some downside work to do before this is all over . . .