The Bear Market Blues: A Diagnosis for Our Times

October 25 (Reuters) – War. Inflation. Polarization. Horrible headlines bounce around the internet, stocks slide, wealth crumbles and the mood on Wall Street has rarely been more bleak.

While some opportunists thrive in adversity, experts say it negatively impacts mental health for many investors.

Relatively new areas of psychology and economics examine investor behavior, herd mentality, panic, mania, and hidden biases that influence decision-making — often in ways that negatively affect portfolio performance. Nobel Prizes have been awarded to several behavioral finance pioneers in recent decades.

The medical profession also has leading 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 cited BMDS symptoms as sadness, sleep disturbances, impaired concentration, irritability, guilt, discouragement, gastrointestinal distress, and/or headaches.

Who hasn’t experienced a few in times of intense stress?

To keep traders’ minds straight, some prominent hedge funds have retained in-house psychiatrists and performance coaches, the type popularized by Wendy Rhoades’ character on the Showtime TV series “Billions.”

Schott told Reuters that the work of Nobel laureate Vernon Smith has shown that market bubbles are mainly due to psychological factors, not financial ones. After prolonged bull markets, investors tend to deny during bear markets.

“Part of that, from a psychological standpoint, is defense against depression,” said Schott, who practiced psychoanalysis for 38 years.

“Why did I buy it? Why didn’t I sell it? There is a lot of self-blame instead of accepting that the markets are going up and down,” he said.

MARKET RISK FACTORS NEARLY UNMATCHED

The S&P 500 (.SPX) fell more than 27% year-to-date in mid-October. Even with a rebound in the past seven trading days, it is still down 21% this year and hasn’t been this low since emerging from the COVID-19 pandemic panic two years ago. The horrific downturn is in stark contrast to the bull market euphoria a year ago, when the benchmark index hit a record high, reached in January.

For younger investors who haven’t experienced a prolonged downturn, the bull-market, buy-the-dip strategy of the past decade no longer works. They can experience a kind of cognitive dissonance, Schott said.

The number of risk factors to account for today is almost unprecedented in the post-World War II era: Russia’s war on Ukraine, worst inflation in memory, rising interest rates, slowing economies, fear of another war over Taiwan, American midterm elections and the continued presence of former US President Donald Trump.

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

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

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

“I can’t remember another time when so many CEOs warned of an imminent recession before they actually got into it. Media stories help fuel this anxiety frenzy. It’s not their fault;

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

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

“One of the things that now, compared to past recessions, is the prevalence of social media, where you have that spread of news flow, negativity and opinions very, very quickly,” she told Reuters. “That essentially 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 sunrise.” Negative sentiment readings indicate that the market is running out of sellers and is therefore considered a bullish signal.

“Bear markets generally don’t end with good news. They end when the news is hopeless and when it just feels like there’s no chance of this thing recovering any time soon,” Paulsen said.

Reporting by Alden Bentley; Editing by Josie Kao

Our Standards: The Thomson Reuters Trust Principles.

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