As US markets began to rise after Donald Trump’s inauguration as president of the USA there were many experts predicting a short term slump. Investors seemed uninterested in political concerns and continued to plough money into the markets. Much was being taken for granted in terms of US economic recovery, interest rates and political stability. However, over the last couple of weeks we have seen some significant volatility in US markets. Has this been brought about by the herd mentality?
Cryptocurrencies signalled the start of the correction
It seems difficult to believe that the massive volatility of late is over and the markets are set to return to their growth path. Well, a number of experts believe that this is the case and this short-term “reality-check” has happened, been digested and ultimately ignored by investors. How does this relate to cryptocurrencies?
Those who follow cryptocurrencies will be well aware of the massive increase in the value of Bitcoins which touched $20,000 a coin just a few weeks ago. The price now stands at just over $10,000 but the problem is the herd mentality. Time and time again over the last 12 months we have heard about cryptocurrencies but the vast majority of investors simply ignored them. It was only when the price of Bitcoins jumped dramatically that investors began to take notice. However, what were they buying?
Ignorance is bliss
If you ask the majority of private investors about the structure of cryptocurrencies they won’t have a clue. This was the start of the recent herd mentality with investors ploughing thousands of dollars into cryptocurrencies without even knowing what they were really buying. It is no coincidence that the top of the US market, at least in the short term, coincided with a significant slide in the value of Bitcoins. The herd mentality dragged many people into the cryptocurrencies sector and the herd mentality, together with desperation, has seen many bailout with significant losses. There are still those holding on to the dream that Bitcoin will return to $20,000 a coin in the short term but they are fewer in number.
Tech stocks
History shows us that technology shares are perhaps the most heavily influenced by investor sentiment. We saw the likes of Snapchat rising sharply on the initial flotation only to collapse although there has been a small recovery of late. We’ve even seen the likes of Apple feeling the wrath of investors who have now turned more negative on the company than at any time in its recent history.
Technology shares led the market higher and over the last week or so they have led the market lower – so if you want a barometer of investor sentiment and short-term market movements, keep a very close eye on the technology sector. Historically a switch into technology shares has often been to the detriment of “traditional stocks” and vice versa. Over the last few weeks this has not necessarily been the pattern with some of the old favourites such as General Electric Company flirting with a return to favour only to fall by the wayside.
The herd mentality has led to greater and greater volatility with technology shares and ultimately with the underlying indices. Indexes such as the Dow Jones Industrial Average, and the NASDAQ to an even greater extent, are influenced today by technology shares more than ever before. They are the way forward, they are the future but unfortunately not all technology shares will be successful. So, this new trend of the herd mentality running stocks and markets higher and higher only to see them plummet and exaggerate the eventual “correction” seems here to stay.