What are "animal spirits"?

“Animal spirits” is a term coined by the famous British economist, John Maynard Keynes, to describe how people arrive at financial decisions, including buying and selling securities, in times of economic stress or uncertainty. Today, animal spirits describe the psychological and emotional factors that drive investors to take action when faced with high levels of volatility in the capital markets.

Animal spirits in the market are the emotional factors of greed and fear that move investors to trade emotionally.

Wells Fargo Economics has developed an “Animal Spirits Index” (ASI).

https://wellsfargo.bluematrix.com/links2/html/4cc392ac-f4f9-472c-9ed7-0b7003c49fdb

The ASI consists of five indicators: the S&P 500 index, the Conference Board’s Consumer Confidence Index, the yield curve (the spread between the 10-year and three-month Treasury yields), the VIX Index and the Economic Policy Uncertainty Index. The policy uncertainty and VIX indexes inversely effect the ASI. In other words, a rise in uncertainty or volatility decreases the index, while a fall increases the index, all else equal.

The S&P 500 index, the Conference Board’s Consumer Confidence Index, the yield curve (the spread between the 10-year and three-month Treasury yields), and the VIX Index are all available to the public and I frequently report them in my Control Panel posts. I have never heard of the Economic Policy Uncertainty Index before – it’s a proprietary index based on information from various sources, including several newspapers.

The Animal Spirits Index (ASI) increased to -0.13 in March, up from -0.31 in February. Previous reports detail the index methodology, but on a basic level, an index value above zero indicates optimism and a value below zero suggests pessimism.1 Through March, the ASI has been negative for 15 straight months.

Wells Fargo expects a recession in the second half of 2023.

Wendy

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The ASI needs to be for the Nasdaq. Missed opportunity.

A better handle for ‘animal sprits’ is the fight or flight survival instinct humans developed on the African Savanah, fight = greed, flight = fear. It’s something we need to tame to be successful in the market.

The Captain

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