The Bear Market Blues: A Diagnosis for Our Time

Oct 25 (Reuters) – War. Inflation. Polarization. Horrifying headlines ricochet across the internet, stocks are skidding, wealth is eroding, and the mood on Wall Street has rarely been so bleak.

While some opportunists thrive on adversity, experts say for many investors it hurts mental health.

Relatively new areas of psychology and economics examine investor behavior, herd mentality, panic, mania, and hidden biases that affect decision-making – often in ways that negatively affect market performance. wallet. Nobel Prizes have been awarded to several pioneers of behavioral finance over the past decades.

The medical profession also has distinguished specialists. John Schott MD, portfolio manager at The Colony Group, retired psychiatrist and recognized expert in market psychology, coined the term Bear Market Depressive Syndrome (BMDS) in his 1998 book “Mind Over Money”.

In a 2009 American Psychoanalyst article, Schott listed symptoms of BMDS as sadness, trouble sleeping, decreased concentration, irritability, guilt, discouragement, gastrointestinal issues, and/or or headaches.

Who hasn’t experienced some of those moments of intense stress?

To keep traders’ heads screwed tight, some top hedge funds have hired in-house psychiatrists and performance coaches, of the type popularized by Wendy Rhoades’ character on Showtime’s “Billions.”

Schott told Reuters that the work of Nobel laureate Vernon Smith has demonstrated that market bubbles are primarily driven by psychological, not financial, factors. After prolonged bull markets, investors tend to deny during bear markets.

“Part of it, from a psychological point of view, is the defense against depression,” said Schott, who practiced psychoanalysis for 38 years.

“Why did I buy it? Why didn’t I sell it? There’s a lot of self-blame rather than accepting markets go up and down,” he said.

ALMOST UNPRECEDENTED MARKET RISK FACTORS

The S&P 500 (.SPX) was down more than 27% year-to-date in mid-October. Even with a rebound over the past seven trading days, it’s still down 21% this year and hasn’t been this low since emerging from the COVID-19 pandemic panic two years ago. The appalling downturn contrasts with the bull market euphoria of a year ago, when the benchmark reached an all-time high reached in January.

For young investors who haven’t experienced prolonged downturns, the bull market strategy of the past decade no longer works. They may experience a kind of cognitive dissonance, Schott said.

The number of risk factors to deal with these days is almost unprecedented in the post-WWII era: Russia’s war on Ukraine, the worst inflation in memory, rising interest rates interest, slowing economies, fear of another war over Taiwan, the US midterm elections and the continued presence of former US President Donald Trump as a divisive issue.

A weekly survey by the American Association of Individual Investors shows that the ratio of the number of bulls to bears at -33.8% ranks among the most negative in the survey’s 35-year history.

Goldman Sachs said its sentiment indicator over the last week of September posted its 31st consecutive negative reading, a streak surpassed only by 32 consecutive weeks of negative readings ending in March 2016.

Jim Paulsen, chief investment strategist at Leuthold Group, Minneapolis, noted that the “blue mood” extends beyond Wall Street, with consumer confidence at post-war lows and sentiment falling. among small businesses and in the C suite.

“I can’t remember another time when so many CEOs warned of an impending recession before they were actually out of it. Media reports help fuel this frenzy of fear. It’s not their mistake ;

there’s so much great material,” he wrote in a recent note.

Call it “information overload,” with news amplified 24/7 on social media. Seema Shah, chief global strategist at Principal Asset Management, called it an “echo chamber of negativity”.

“One of the things now, compared to previous downturns, is the prevalence of social media, where you have this dispersion of the flow of information, negativity and opinions that come in very, very quickly,” he said. she told Reuters. “It basically moves the market at a faster pace than you would have seen in previous periods of market weakness.”

But, as they say, “It’s darkest just before dawn.” Negative sentiment readings indicate that the market is short of sellers and are therefore considered a bullish signal.

“Bear markets don’t usually end with good news. They end when the news is hopeless, and when it feels like there’s no chance this thing will recover soon,” he said. Paulsen.

Reporting by Alden Bentley; Editing by Josie Kao

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