Certain phrases, like 'depression', 'green shoots' trigger mood shift
NEW YORK -- Images of bread lines, soup kitchens and other flashbacks to the Great Depression planted enough worry in the minds of stock investors in early March to cause a selling stampede.
But then signs of hope in the form of economic data that were bad but not as bad as feared — a phenomenon economists dub "green shoots" — sparked a 37% rally in the Standard & Poor's 500-stock index.
This week, stocks have fallen 4% after weak retail sales sparked worries that the green-shoots thesis may not mean a sustainable recovery.
Big market mood shifts bear watching. These types of stock market story lines or media-driven investment ideas, such as the risk of a depression or the more upbeat green-shoots theme, wield huge power over investors, says Woody Dorsey of Market Semiotics, an expert in the psychology of investing.
"Any time a market idea gets propagated, it becomes a fad. It reflects investors' thinking and is used as a rationale to sell or buy stocks," Dorsey says. "In financial culture, you can only have a few good stories at a time, and they are constantly changing."
In a span of nine weeks, investor sentiment did a 180-degree psychological turn.
"We went from people thinking the end of the world was near in October, to Dow 10,000, here we come," says Price Headley, chief analyst at BigTrends.com.
That shift from doomsday thinking (and plunging stocks) to a "we will survive" mentality (and rising stocks) is evident in the number of media mentions of two phrases that conjure up very different emotions: the financial insecurity associated with the term "Great Depression" and the sense of security elicited by the phrase "green shoots."
Investor sentiment, especially the extremes of fear and greed, has historically been a key factor in determining the direction of stock prices. During periods of fear, stocks tend to go down. In periods of unbridled optimism, stocks tend to go up.
"Mood is hugely important to a person's decision-making, whether it be a financial one or what to have for dinner," says Rick Bensignor, chief market strategist at Execution.
