Sugar Pills

I know I’m doing a lot of stuff about the alleged “Trump Rally” lately but I have good reasons: First of all, it’s the most dominant story in the market by far, now that the Fed is basically PGing a rate hike.

And second, it’s absolutely absurd and people are running around acting like maniacs, which I love. You guys know I love that.

Anyway, my friend Nick Colas, Chief Strategist at Convergex, a global brokerage firm in New York, put something out about how Americans are more susceptible to “the placebo effect” than patients anywhere else around the world. When you tell them they’re taking a drug, they are more prone to believe that it’s working and actually show improvement. Especially with psychiatric drugs although the effect is not limited to those.

American investors are the same people as American drug trial candidates, more or less, so it should be no surprise that they’re acting as though we already got a trillion in infrastructure spending, tax cuts, lap dances and whatever else might be coming.

It’s a sugar pill. The medication isn’t in our system yet but we believe it’s working already. You should see some of the sell-side research hitting my box. Anyway, here’s Nick:

The real magic of the current domestic stock market rally is that it pretends to forecast (with remarkable precision, it must be said) a set of legislative outcomes in 2017. You know the list: lower corporate and personal taxes, less regulation, more infrastructure spending.  All this may come to pass, for after all President Elect Trump has the notional backing of a Republican Congress, and therefore the GOP essentially “Owns” the U.S. economy for the next 2 years.  But even the most bullish assessment of this scenario must admit that it seemed very unlikely just a month ago.  And yet investors have no problem bidding up risk assets like they just KNOW how the world will look in a year.

It is at times like these that I consider the Placebo Effect from the world of medicine.  That’s the one where patients and research subjects report beneficial effects from a substance (a sugar pill, for example) that doesn’t actually do anything.

The common link between investor psychology and placebos is one word: faith.  Sugar pills “Work” best when subjects believe they will work…

None of this is to say that the current rally isn’t ‘Real’; we believe it is sustainable at least through the start of 2017. Rather, it is to highlight just how important “Faith” can be to human psychology.  Placebos and faith have their limits, of course.  But those boundaries are further away than you may realize.

Party on?


Placebos and Market Psychology
Convergex – December 5th 2016

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