Glass Half Full Risks

Chidem Kurdas

Systemic risks have receded, even with the mini-crisis in Cyprus and European economies in recession. The ghost of the 2008 credit crisis and the fears it created may finally be banished.

Now people talk about the dangers of optimism. Recent years were dominated by investors taking on riskier assets and then getting out as soon as new problems emerged. That pattern seems to have ended.

How should investors think in the new environment? Focus on idiosyncratic risks within each asset class, not the potential for risk-on, risk-off market swings, Barclays’ head of research Larry Kantor advises. Equities are the only game in town, he says.

The main danger of seeing the glass as half full is the chance it will not measure up to your expectation. US stocks did so well last year that it will take really good news to push the market significantly higher.

The second issue Mr. Kantor highlights is the possibility that the Federal Reserve will start reversing its ultra-easy monetary policy earlier than expected. Rising rates will obviously undermine bond prices but the question is what will happen to equities. The bull market in stocks may not survive the end of monetary easing, Mr. Kantor warns.

Psychologists find that optimistic individuals do better overall than pessimistic people—the latter tend to give up on their pursuits, seeing no hope. But on the other hand pessimists make more accurate predictions.

Investors are subject to the same paradox. Bullish stock buyers made high returns in 2012. The Fed’s trillions of dollars of  purchases are the big driver of asset prices and investor elation. Dealing with the end of the immense boon emanating from Washington requires – and will no doubt bring forth – a dour frame of mind.

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Tags: Barclays, Cyprus, Federal Reserve, investor psychology, Larry Kantor