October 25 (Reuters) – War. inflation. Polarization. Terrible headlines swirl around the internet, stocks are sliding, wealth is eroding and the mood on Wall Street has rarely been gloomier.
While some people succeed in struggling with opportunities, experts say it takes a toll on the mental health of many investors.
Relatively new fields in psychology and economics examine investor behavior, herd mentality, panic, mania and hidden biases that influence decision-making – often in ways that negatively impact portfolio performance. A number of behavioral finance pioneers have been awarded Nobel prizes in recent years.
The medical profession also has distinguished specialists. John Schott MD, portfolio manager at The Colony Group, retired psychiatrist and recognized expert on 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, sleep disturbances, decreased concentration, irritability, guilt, discouragement, gastrointestinal problems and/or headaches.
Who hasn’t experienced some of these during times of intense stress?
To keep traders’ heads safe, some prominent hedge funds have retained in-house psychiatrists and performance coaches, the kind popularized by Wendy Rhoades’ character on the Showtime television series “Billions.”
Schott told Reuters that Nobel laureate Vernon Smith’s work showed that market bubbles are primarily caused by psychological factors, not financial factors. After long bull markets, investors tend to decline during bear markets.
“Part of that, psychologically, is protection against depression,” said Schott, who has practiced psychoanalysis for 38 years.
“Why did I buy it? Why didn’t I sell it? There is a lot of self-blame rather than accepting that the markets go up and down,” he said.
MARKET RISK FACTORS WERE NEVER GROWTH
The S&P 500 (.SPX) was down more than 27% year to date in mid-October. Even with a bounce over the past seven trading days it’s still down 21% this year and not this low since it emerged from the COVID-19 pandemic panic two years ago. This contrasts with the dramatic turnaround in the bull market a year ago as the benchmark index was heading for an all-time high, reached in January.
For younger investors who haven’t experienced a protracted downturn, the bull market, buy-the-dip strategy of the past decade no longer works. They can experience a form of cognitive dissonance, Schott said.
The number of risk factors to process these days is almost unprecedented in the post-World War II era: Russia’s war on Ukraine, the worst inflation in memory, rising interest rates, slowing economies, fear of another war on Taiwan, US mid-term. elections and the continued presence of former US President Donald Trump.
A weekly survey by the American Association of Individual Investors shows that the ratio between the number of bulls and bears at -33.8% is among the most negative in the 35-year history of the survey.
Goldman Sachs said the Sentiment Indicator last week of September posted its 31st consecutive negative reading, a streak only surpassed by 32 straight weeks of negative readings that ended in March 2016.
Jim Paulsen, chief investment strategist at the Leuthold Group, in Minneapolis, noted that the “blue mood” extends beyond Wall Street, with consumer confidence at a post-war low and sentiment down among small businesses and the C-suite. .
“I can’t remember any other time when so many CEOs warned of an impending recession before I was in one. Media stories help feed this frenzy of fear. It’s not their fault;
there’s only so much good content,” he wrote in a recent note.
It’s called “information overload,” with 24/7 increased news on social media. Seema Shah, chief global strategist at Prime Asset Management called it an “echo chamber of negativity”.
“One of the things now, relative to the previous downturn, is the prevalence of social media, where that spread of news flow, negativity and opinion is coming through very, very quickly ,” she told Reuters. “That basically moves the market at a faster pace than you would have seen in previous periods of market weakness.”
But, as they say: “It is darkest just before dawn.” Negative sentiment readings indicate that the market is turning out of sellers, so they are considered a bullish sign.
“Bear markets don’t generally end with good news. They end when the news is hopeless, and when it just feels like there’s no chance for things to recover soon,” said Paulsen.
Reporting by Alden Bentley; Editing by Josie Kao
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