© Stocksak. FILE PHOTO A trader works on the New York Stock Exchange (NYSE), in New York City, U.S.A, June 13, 2022. REUTERS/Brendan McDermid/File Photo
By Alden Bentley
(Stocksak) – War. Inflation. Polarization. There are some shocking headlines floating around the internet. Stocks are falling, wealth is eroding, and Wall Street is feeling gloomier than ever before.
Although some investors thrive in adversity and others are successful, experts say it can have a negative impact on their mental health.
New fields in psychology and economics focus on investor behavior, panic, mania, and hidden biases that can affect decision making, often in negative ways. Many behavioral finance pioneers have received Nobel Prizes in recent years.
There are many distinguished specialists in the medical profession. John Schott MD was a portfolio manager at The Colony Group and a well-known expert on market psychology. He wrote “Mind Over Money” in 1998.
Schott described BMDS symptoms in an American Psychoanalyst article from 2009. They included sadness, sleep disturbances and decreased concentration.
Who hasn’t experienced them during intense stress situations?
Some prominent hedge funds have hired in-house psychiatrists or performance coaches to keep traders on track. This is the same type of coach Wendy Rhoades, who appeared on “Billions” on Showtime TV.
Schott explained to Stocksak that Vernon Smith’s Nobel laureate research showed that market bubbles are not due to financial factors but psychological ones. Investors are more likely to deny bear markets after long bull markets.
Schott, who has been practicing psychoanalysis for 38-years, said that “part of that, psychologically speaking, is defense against depression.”
“Why did it cost me so much? Why didn’t it sell? He stated that there is a lot of self-blaming, rather than accepting the market going up and down.”
MARKET RISK FACTORS ALMOST UNPRECEDENTED
In mid-October, the index was down more that 27% year-to date. Even with a rebound in the last seven trading days, it is still down 21% this season and has not been this low since two years ago when it emerged from the COVID-19 pandemic panic. This stark contrasts with the bull market euphoria of January last year, when the benchmark index was at an all-time high.
The bull-market, buy the-dip strategy of the past ten years is no longer applicable to younger investors who haven’t experienced prolonged downturns. Schott explained that they can experience a type of cognitive dissonance.
The post-World War II era has seen a lot of risk factors.
American Association of Individual Investors’ weekly survey shows that the ratio of bulls and bears at -33.8% is among the worst in the survey’s 35-year history.
Goldman Sachs (NYSE 🙂 reported that its Sentiment Index in the last week September posted its 31st consecutive negative reading. This streak was surpassed only 32 weeks ago.
Jim Paulsen, chief investment strategist for the Leuthold Group in Minneapolis, stated that the “blue mood” extends beyond Wall Street. With consumer confidence at a low post-war level and sentiment down among small businesses as well as the C-suite, sentiment is down.
“I don’t recall any other time when so few CEOs warned of a coming recession before actually being there.” This fear is fed by media stories. It’s not their fault.
“There is just so much great material,” he wrote in an e-mail.
You can call it “information overload”, as news is amplified 24/7 via social networks. Principal Asset Management’s chief global strategist Seema Shaikh called it the “echo room of negativity.”
Stocksak was told by her that one of the new things, relative to previous downturns in the market, is the widespread use of social media. “There’s a dispersion of news, negativity and opinions coming through very rapidly,” she said. “That basically moves the markets at a faster rate than you would have seen during previous periods of market weakness.”
However, they say that it is darkest just before dawn. Negative sentiment readings are a sign that the market is losing sellers and are therefore considered a bullish signal.
“Bear market don’t always end with good news. Paulsen said that they end when the news becomes hopeless and when it seems like there is no chance for this thing to recover soon.