The bear market for stocks isn’t over. In fact, it may have aways to go. That’s because — even with the S&P 500 SPX,
This bottom-fishing is more reminiscent of the “slope of hope” that bear markets typically descend than the “wall of worry” bull markets like to climb. That doesn’t mean the U.S. stock market couldn’t mount an impressive rally from current levels. If it does, it more likely would be a bear-market rally than the beginning of a new bull-market leg that takes the major market averages to new all-time highs.
A review of past bear markets suggests that, when the current bear market does hit bottom, few investors will even be contemplating that possibility. We either won’t even be paying attention, having grown so dejected as to have thrown in the towel, or will consider any sign of market strength as a bear market trap.
That’s not Wall Street’s current mood. Bear-market psychology follows a progression that is similar to what psychologists call the five stages of grief — denial, anger, bargaining, depression and acceptance. Here’s how they manifest in the stock market:
- Denial — In this initial stage, the prevailing view is that stock-market weakness is nothing more than a buying opportunity. Far from getting angry (see next stage), investors remain quite sanguine, since the market’s pullback offers an opportunity to buy stocks more cheaply than would have been the case had the bull market kept going.
- Anger — Denial becomes increasingly difficult to sustain as the market’s pullback becomes too severe. Investors’ mood eventually morphs into anger, as they rail against the unfairness of the pullback. A hallmark of this stage is where investors see the pullback as a personal affront — as if the market cares whether you or I lose money.
- Bargaining — In this stage, investors’ redirect their energies to figuring out if they can maintain their lifestyles despite the hit to their portfolio; retirees rejigger their financial plans. Investors promise to give up that fancy new car or the European vacation — the fat from their budgets — so long as they don’t have to cut bone.
- Depression — As the market continues to slide, the realization sets in that cutting the fat isn’t going to be enough. Major changes in lifestyle will be required. Near-retirees work for longer than originally planned; retirees go back to work.
- Acceptance — In this final stage, investors throw in the towel. They surrender to the bear market and stop even fantasizing about when it might end. They treat any sign of market strength as a suckers’ rally, luring the gullible into losing more money on the next leg down.
Where we are now in this cycle
My impression is that we’re no further through this five-stage cycle than the second one. There are individual exceptions, of course, since not all investors progress at the same pace. But the preponderance of the attitudes I encounter are either that the pullback is a buying opportunity (stage one) or that the market’s weakness is profoundly unfair (stage two).
Investors’ progression through these stages must be genuine. As I noted last week, it’s not meaningful to say you’ve thrown in the towel, only to quickly jump on the bullish bandwagon at the first sign of market strength. Such a reaction is little more than stage-one behavior in disguise.
Which brings me to recent claims that we’re seeing signs of capitulation on Wall Street. If the capitulation were real, that would be evidence that we’re in stage five. But I’m skeptical: In a genuine capitulation, there is no eagerness to detect capitulation. Key hallmarks of genuine capitulation are apathy and indifference.
Not all declines go through all five stages, of course, just as not all corrections turn into major bear markets. So this discussion doesn’t mean the market still has a lot further to fall. But if the bulls want to claim the force of contrarian analysis to support their belief in a rally, there needs to be genuine capitulation. Otherwise, the bulls’ arguments are simply evidence that the market’s decline is in early innings.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
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The article you provided delves into the stages of investor psychology during a bear market, framing it through the lens of grief stages: denial, anger, bargaining, depression, and acceptance. The author, Mark Hulbert, analyzes market sentiment and stages of behavior, asserting that the market might not have reached the capitulation stage, a marker of a potential turnaround.
Let's break down the concepts mentioned in the article:
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Bear Market: A bear market refers to a prolonged period of falling stock prices, typically 20% or more from recent highs, often accompanied by negative sentiment and pessimism among investors.
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S&P 500: A stock market index that measures the performance of 500 large companies listed on stock exchanges in the United States. It's widely regarded as a gauge for the overall health of the stock market.
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Nasdaq Composite: Another stock market index that includes more than 2,500 stocks, primarily technology and internet-related companies. It's used to assess the performance of the tech sector.
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Russell 2000 Index: This index measures the performance of around 2,000 small-cap companies in the United States. It's often used as a benchmark for small-cap stocks.
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Psychology of Investor Behavior: Hulbert compares investor sentiment during a bear market to the stages of grief, indicating how investors typically progress from denial to acceptance as the market declines.
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Stages of Investor Sentiment:
- Denial: Investors view market weakness as a buying opportunity.
- Anger: As the decline intensifies, investors become frustrated and see it as unfair.
- Bargaining: Investors try to make adjustments to their portfolios or financial plans to mitigate losses.
- Depression: Realization sets in that significant lifestyle changes may be necessary due to market losses.
- Acceptance: Investors give in to the bear market, losing hope for a quick recovery.
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Capitulation: The stage where investors surrender to the market's trend, characterized by apathy and indifference. It's seen as a potential signal of a market bottom.
Hulbert suggests that the current market sentiment might still be in the early stages (denial or anger) rather than nearing capitulation or acceptance, which could signal a turnaround.
This analysis provides a psychological perspective on how investors react during market downturns, emphasizing the importance of understanding sentiment shifts in assessing market conditions.
