Bulls, Bears, & Investor Sentiment

Fundamentals of Market Investing by Adam J. McKee

Investments have an annoying habit of all doing well as a group or all tanking as a group.  When the market “crashes,” you will lose money, no matter what stocks you own.  When the market is in an uptrend, it is said to be Bull Market.  When the market is in a downtrend, it is said to be a Bear Market.  Different investors talk about these things with reference to different timeframes, and you must be careful to read too much into this.

If you are a long-term investor, watching the financial news will likely drive you crazy.  If you look at a single day’s chart of your favorite stock, you may think that there is blood running in the streets.  Switch from one day to one year, and you will barely even notice the blip.  When the trend does get longer, investors may have a reason for concern, depending on their investment timeframe and investment strategy.

Absent new economic data, moves in stock prices are usually a matter of investor sentiment with little to do with fundamentals of companies or the economy at large.  Investor sentiment refers to the basic attitude that investors have toward an investment or the overall market.  Because it relies on attitudes, investor sentiment is often more a matter of psychology than it is a matter of economics.

Strangely enough, economists have long ignored these psychological aspects of investing, considering them unknowable and uncontrollable forces or preferring to not consider them.  Relative to the long history of economics, behavioral economics is a recent phenomenon.  Behavioral economics is a fascinating field that tries to establish the psychological and sociological forces that move markets in irrational ways that confound the rational logic of fundamental investors.

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