Bear Market Blues: A Diagnosis for Our Time

Inflation and war. Polarization. Internet users are being bombarded with horrifying headlines, stocks are plummeting, wealth is being lost, and the mood on Wall Street has never been more depressing.

While some businesspeople thrive in tough situations, experts claim that for many investors, it has a negative impact on their mental health.

The study of investor behavior, herd mentality, panic, mania, and hidden biases that influence decision-making and frequently have a negative impact on portfolio performance is a relatively recent development in the fields of psychology and economics. In recent decades, several behavioral finance pioneers have received Nobel prizes.

There are notable specialists in the medical field as well. Bear Market Depressive Syndrome (BMDS) was first used by John Schott, MD, a portfolio manager at The Colony Group, retired psychiatrist, and well-known authority on market psychology, in his 1998 book "Mind Over Money."

Schott described the symptoms of BMDS as sadness, sleep disturbance, decreased concentration, irritability, guilt, discouragement, gastrointestinal problems, and/or headaches in a 2009 American Psychoanalyst article.

Who hasn't gone through some of those during stressful times?

Some well-known hedge funds have employed in-house psychiatrists and performance coaches, of the type made popular by the Wendy Rhoades character on the Showtime TV series "Billions," to keep traders' heads screwed on straight.

According to Schott, Nobel laureate Vernon Smith's research shows that psychological rather than financial factors are the primary causes of market bubbles. Investors frequently enter a state of denial during bear markets after long bull markets.

According to Schott, a psychoanalyst with 38 years of experience, "defence against depression is part of that from a psychological standpoint."

"How come I bought it? How come I didn't sell it? There is a lot of self-blame instead of accepting that markets fluctuate, "said he.

MARKET RISK FACTORS ALMOST UNPRECEDENTED

Mid-October saw the S&P 500 (.SPX) down more than 27% year to date. It has not been this low since it was coming out of the COVID-19 pandemic panic two years ago, despite a rebound over the last seven trading days. This year, the stock is still down 21%. The horrific downturn stands in stark contrast to the bull market euphoria of a year ago, when the benchmark index was rising to a record high that was attained in January.

The bull-market, buy-the-dip strategy of the previous ten years is no longer effective for younger investors who have not gone through prolonged downturns. According to Schott, they might go through a phase of cognitive dissonance.

There are currently so many risk factors to consider that it is almost unheard of in the post-World War II era: Russia's conflict in Ukraine, the worst inflation in recent memory, rising interest rates, slowing economies, worry about another Taiwanese war, the upcoming midterm elections in the US, and the continued polarizing presence of former US President Donald Trump.

The American Association of Individual Investors conducts a weekly survey, and the results show that the ratio of bulls to bears, which is currently 33.8%, is among the worst in the survey's 35-year history.

Only 32 straight weeks of negative readings, which ended in March 2016, were longer than the 31 consecutive negative readings recorded by Goldman Sachs' Sentiment Indicator in the final week of September.

The "blue mood," according to Jim Paulsen, chief investment strategist at the Leuthold Group in Minneapolis, extends beyond Wall Street, with consumer confidence at a post-war low and sentiment negative among small businesses and in the C-suite.

"Never before in my memory have so many CEOs predicted an impending recession before one actually occurred. This fear craze is fueled in part by media reports. They are not at fault;

There is simply so much excellent content "In a recent note, he wrote.

Call the constant news amplification on social media "information overload." The "echo chamber of negativity" is how Principal Asset Management's chief global strategist Seema Shah described it.

According to her, one difference between this downturn and others is the prevalence of social media, which allows for the rapid dissemination of negative news and opinions. In essence, this causes the market to move more quickly than it would have during previous periods of market weakness.

However, as the proverb goes, "Darkest just before dawn." Readings of negative sentiment are regarded as a bullish sign because they show that there are no more sellers in the market.

"In general, bear markets don't end well. They come to an end when the situation seems hopeless and there is little chance of a quick recovery "said Paulsen.