The Fear Trifecta Is in Play

Feb 27, 2022

It’s been all doom and gloom in the headlines recently…

Covid, inflation, Russia… There seem to be never-ending reasons for pessimism.

I’ll let others comment on whether or not these fears are justified — though, in Ukraine’s case, one fear definitely is.

Instead, let’s focus on what’s on the minds of consumers and investors as all this turmoil unfolds, or what I’m calling the “Fear Trifecta.”

And more importantly, how markets have historically performed following similar levels of fear and pessimism on Wall Street.

Fear No. 1: Inflation

Inflation is up, big time.

Consumer prices surged in January, with the Consumer Price Index climbing 7.5% from the previous year, its largest 12-month increase since 1982.

The Federal Reserve acknowledged that its “transitory” hopes were dashed, and interest rate hikes are definitely coming.

It’s safe to say consumers took notice of the surge in inflation:

The chart above shows the number of people talking about a fear of inflation or rising prices over time.

And the data speaks for itself, trending +387% YoY and 37% QoQ.

Fear levels are hitting record highs by the day, up nearly fivefold from the already elevated levels they were at a year ago.

Fear No. 2: Rising Gas Prices

Broad inflation is one thing, but pain at the pump is something consumers tend not to forget or forgive.

According to the U.S. Energy Information Administration, the average U.S. retail price for regular-grade gasoline rose to $3.01 per gallon in 2021, the highest average nominal price since 2014.

So it’s no surprise that, while concerns about gas prices are not yet at the historic highs set last fall, they are resurging as we speak:

Concerns have been steadily rising since the end of 2020… However, the sustained level of fear we’re seeing now is approaching uncharted territory, +173% YoY. Those fears have risen due to Russia’s invasion of Ukraine.

Even without the Russia-Ukraine situation (which we will focus on next), the fears of gas price impacts on family budgets have turned into reality.

As a result, we could soon see a depleted consumer wallet that faces higher prices on other basic goods as a result of inflation (I refer back to Fear No. 1).

Fear No. 3: Stock Market

So consumers are showing high levels of concern regarding inflation and gas prices…

But now there is an entirely new set of problems to manage: geopolitical risks of war.

As you can see from the chart above, LikeFolio’s Investor Fear Index has hit all-time highs as a result Russia’s invasion of Ukraine, trending +75% QoQ and +105% YoY.

What happens as a result of geopolitical risk?

Investors run to safe-haven assets — selling growth stocks, tech stocks, and cryptocurrencies at a frenetic pace.

The Good News

For savvy investors who have read history, there is reason to be optimistic and an argument for being bold.

The last two times the LikeFolio Fear Index set record highs, markets were near short-term bottoms and subsequently rallied.

And we’re not talking a small rally; we mean portfolio-defining moves.

In the two years following the 2018 low (represented by the “Dow Plunges” fear spike in the chart above), the NASDAQ rallied +58%.

Following the “Covid Fears” spike, the NASDAQ gained as much as +149% from the 2020 lows.

Now, let’s not be hasty and jump into positions here…

Obviously, we don’t know where markets are headed.

But if we use history as a guide, investor fears hitting record levels could make for huge opportunities.

While it’s easy to get caught up in the fear, it’s important to focus on what the data is telling us.

And with our unique access to consumer data, we can see a potential opportunity on the horizon.

As always, when we see big opportunities, LikeFolio members will be the first to know.

Andy Swan,
Founder, LikeFolio