Yesterday while on the phone with a new client who is unsure as to whether or not she truly wants to get involved in the real estate market, I decided that I would explain to her exactly how the market cycle of emotions play into any sort of market.
As a professional service provider, my goal is not necessarily to make rash judgments about the market, or suggest the absolute direction of any market. Markets are naturally chaotic, and any one who works in the world of trading or finance will tell you that forecasting markets is very very challenging.
That said, the cycle of market emotions that many allocation management specialist apply to long-term investments essentially highlights the emotional range of market movement.
In the graph above you can see that we move through the early stages of and excitement through the thrill and euphoria that eventually leads to a high risk investment.
Of course the American house remains an asset, and assets have very high rate of return over many many years, but naturally we all love to enter a market during the pullback and capture nice equity bump just after we make our purchase.
Of course it doesn’t always work out that way.
Back to the chart, you can see that anxiety and I’ll and fear all push market prices down. Of course we all saw the anxiety denial and fear that came with the financial turmoil of the late part of the last decade, and as a result the global slide that followed led to the eventual desperation, panic and capitulation that we have seen take place.
Again today in the LA times we saw that banks are furthering their reach as they entrench deeper and deeper into the market by assuming more and more properties for the process of foreclosure. Of course many people this looks like. Of denial and fear, but most market analysts were at the point of capitulation and desperation.
Whether or not price gaps down severely, or another wave of global issues sparks denial, fear and desperation to again resurface, is really known to no one.
But when we look at the cycle of market emotions, we can clearly see that the market has paid us all markets traditionally do, and that we are truly entering a stretch where the spark it potentially could turn and offer the sides of hope that eventually come with if we start of a new cycle.