As market experts talk of ‘animal spirits,’ here’s how to invest now

On Nov. 5, the presidential election handed a decisive victory for President-elect Donald Trump. In the days that followed, the markets soared.

A “Trump trade” led to new index highs for the S&P 500 and Dow Jones Industrial Average, lifted with the help of certain sectors expected to do well under the president-elect’s second term.

As of Monday, the postelection market fervor had started to subside to preelection levels.

Yet, some experts say they are seeing a renewal of so-called animal spirits.

“Animal spirits” is a term first coined by economist John Maynard Keynes and refers to the tendency for human emotion to drive investment gains and losses.

Some experts say animal spirits are a sign of consumer confidence. However, the phenomenon can also be trouble for investors if they take on “excessive risk,” said Brad Klontz, a psychologist and certified financial planner.

“It’s essentially why dead investors outperform living investors, because dead investors are not impacted by their animal spirits,” Klontz said.

Research has shown dead investors’ portfolios tend to outperform, since they are left untouched because they are less likely to be influenced by emotional decisions, such as panic selling or buying.

The recent market runup was not prompted by individual investors chasing the market to a meaningful extent, according to Scott Wren, senior global market strategist at Wells Fargo. Individuals, who were split in their election choices, are also divided in their investment outlook, he said.

“Depending on who your candidate was, you may be excited about the future or fearing the future,” Wren said.

Instead, it has been professional traders and money managers — who couldn’t sit on cash when the S&P 500 index was setting new records every two or three days — who have helped drive the markets higher, he said.

There is also big-picture excitement going into 2025, according to Wren, with expectations for lower taxes, less regulation and reasonable levels of inflation. However, the U.S. economy might have a couple of quarters of slower growth in 2025, he said.

“We’re not going to have a recession,” Wren said. “We think that’s very unlikely.”

Ideally, investors ought to sell stocks when they are priced high and buy when they are low.

But research consistently finds the opposite tends to happen.

Humans are wired to take on a herd mentality and follow the crowd, which guides our decision-making on everything from who we vote for to how we invest, according to Klontz.

“The first thing is to just recognize that nobody is immune from this,” Klontz said.

Now is the perfect time for investors to make sure they have an asset allocation that is appropriate to their personal risk tolerance and financial goals, he said.

“It’s harder to do when the market’s crashed,” Klontz said.

Additionally, it is important to keep in mind that financial advisors, like all humans, are also susceptible to biases. When seeking financial advice, investors should ask questions such as “What would you do as my advisor if the market went down 50%?” Klontz said.

Good advisors should have systems in place to keep them from making big mistakes, Klontz said. They may have an investment committee or a predetermined approach for how they will act.

Importantly, investors should also be asking themselves the same question, Klontz said. For example, if the market drops 40%, are you OK with your portfolio dropping from $100,000 to $60,000?

“If the answer is no, then you probably shouldn’t be all in stocks,” Klontz said.

However, if you are young enough, a big market drop could be an important opportunity to dollar cost average — or invest a fixed amount of money on a regular basis — and position your money for larger gains when it recovers.

“Most people have a real tough time doing that, which is why advisors can help,” provided they are familiar with behavioral tendencies, Klontz said.