There are many people who love Apple’s iPhone, watch, and other items. Many would blindly buy even if it starts making washing machines, they trust Apple. Sachin Tendulkar is one of the greatest in cricket. But masses also believe him when he says on TV that mutual funds are the right thing! SRK, Ajay Devgan, Akshay Kumar are big stars in Indian film industry. Masses also believe them that gutka (kind of tobacco) is the way of a royal lifestyle.
People believe that if something or someone is good in one area, he is good in some other area as well – it is known as halo effect.
First identified by US psychologist Edward Thorndike in 1920, it describes the tendency to make specific inferences on the basis of a general impression.
Halo effect in investing
If any rich or powerful person says anything about stocks or stock markets, people would easily believe him. Elon Musk keeps posting something about Bitcoin and that has always affected its price. The whole world anxiously waits for US Fed to say something and that immediately drives the markets up or down. When SEBI chairperson says markets are overpriced, there was an immediate selloff.
Are these people so reliable?
Let us do some factchecking –
Period 1
News Headlines during year 2007, the year prior to the Great Recession. Housing crisis had led to a severe recession during which global indices had crashed by over 50% in one year and several big global companies vanished.
Bernanke Believes Housing Mess Contained
https://www.forbes.com › 2007/05/17 › bernanke-subp…
17 May 2007 — The subprime mess is grave but largely contained, said Federal Reserve Chairman Ben Bernanke Thursday, in a speech before the Federal Reserve Bank of Chicago.
Bernanke: No Recession On Horizon
https://www.cbsnews.com › news › bernanke-no-recessi…
28 Mar 2007 — Federal Reserve Chairman Ben Bernanke told Congress on Wednesday he doesn’t believe the economy will slip into a recession and rejected the notion raised by …
No Recession, But…
https://www.bloomberg.com › news › articles › no-recess…
19 Dec 2007 — Home prices will fall about 7%, but housing starts will bottom out by midyear. Almost all “no recession” forecasts are predicated on further rate cuts by the …
No Recession in Sight
https://www.wsj.com › Opinion › Commentary
9 Oct 2007 — Despite recent financial turmoil and a dismal housing market, there are key reasons why the economy will continue to expand, albeit at a modest pace, …
A Bullish Call
https://www.barrons.com › articles
17 Dec 2007 — … recession,” with no growth for a year. “We expect the U.S. economy to show the strains of the deflating housing market and credit-market disruptions in …
Part of this article – “Indeed, the dozen seers we’ve surveyed all have penciled in higher stock prices in 2008, although their estimated gains vary widely, from 3% to 18%. On average, the group sees the Standard & Poor’s 500 at 1,640 by the end of next year, or about 10% higher than the recent 1486 with global growth and a benevolent Federal Reserve serving as twin crutches for the aging bull.”
It includes top economists from Goldman Sachs, Morgan Stanely, Credit Suisse etc. all bullish on markets. Standard & Poor’s 500 at the end of 2008 was near 900!
Period 2
Inflation had started rising globally in 2021. Almost all experts said that it was transitory, but it kept rising well into 2022. Fed kept saying that it is transitory, but later on changed its view and started raising rates.
Fed’s Powell says high inflation temporary, will ‘wane’
https://apnews.com › article › inflation-health-coronavir…
22 Jun 2021 — Federal Reserve Chair Jerome Powell said Tuesday that he expects recent price spikes will soon subside and reduce inflation to a sustainable level.
Biden says inflation temporary; Fed should do what it …
https://www.reuters.com › world › biden-says-inflation-…
19 Jul 2021 — U.S. President Joe Biden on Monday said an increase in prices was expected to be temporary, but his administration understood that unchecked inflation over …
Uptick in India’s headline inflation: A transitory phase
https://www.orfonline.org › expert-speak › uptick-india…
18 Jul 2021 — This uptick was driven mainly by sequential price rise in items like oils and fats, eggs, fruits, and pulses. This rise in food prices contributes to 41 percent …
Powell admits Fed got it wrong on inflation, says they …
https://www.foxbusiness.com › politics › powell-fed-wr…
30 Nov 2021 — Federal Reserve Chairman Jerome Powell acknowledged Tuesday that he now expects high inflation to continue into the middle of 2022, stating that the …
Conclusion
Dut to halo effect, masses believe whatever any big name says, even if that person is not related to the field. Why does it happen? Well, it is a different subject – psychology, so you may do your own research on that.
Evergreen ways to create wealth
Bullion will perform better in the current inflationary scenario, but finding the right entry time is crucial as at such record high levels, there may be wild swings in prices.
The classic options hedge strategies work well in all market conditions.
Certain global ETFs can do well in inflationary scenario.
You must check our affordable low risk offerings – Hedged Plan and Adaptive Plan (it adapts to macro trends and allocates assets accordingly). If you are interested in high-risk high-returns, check Commodities Trading Plan.
We also forecast about markets; our major forecasts were –
| Date | Forecast | Result |
|---|---|---|
| May, 2023 | AI, big tech to gain | NASDAQ index is up 24% till 12 Apr, 2024 |
| May, 2023 | Invest in copper | Copper is up 28% till April 2024 |
| Apr, 2023 | Bull market expected | Sensex rose ~23% in next one year |
| Sep, 2021 | Global inflation to rise | Inflation in US rose from 5% to 9% in next 1 year |
| Sep, 2020 | Rally expected | Sensex rose over 75% till 2022 |
| Feb, 2020 | Recession expected | Sensex fell over 30% |
| Apr, 2019 | BJP win and rally | Sensex rose 9% |