Last year saw very strong moves up in equity markets globally. This year has started very positively too, with global equities in USD terms up +8% year-to-date. The US economy remains robust, with inflation largely under control, while Europe and China are showing green shoots of an economic improvement this year. This looks and smells like an equity bull market cycle starting to get underway. So why are so few willing take this view?
This reluctance could be attributed to a collective psychological hangover from recent tumultuous events, most notably the pandemic and subsequent inflation scares. Investors, much like individuals experiencing Stockholm Syndrome, have developed a paradoxical attachment to the negativity and pessimism bred by these crises, leading to an inability to recognize or accept the emerging positive signals in the market.
Stockholm Syndrome, originally identified in hostages who developed a psychological bond with their captors, can metaphorically describe the relationship between investors and the recent bear market conditions in 2020 and 2022.
Prolonged exposure to market volatility, catastrophic economic forecasts, and the tangible impacts of the pandemic and inflation have engendered a form of cognitive dissonance. Investors, accustomed to bracing for the worst, might now struggle to shift their mindset and acknowledge a burgeoning bull market.
The pandemic’s onset was a black swan event that triggered unprecedented global economic disruptions, leading to a steep market downturn. This period was marked by significant uncertainty, fear, and a pervasive sense of doom, which investors had to navigate. The subsequent inflation scares, fuelled by massive fiscal stimuli and disrupted supply chains, further entrenched the market’s bearish sentiment. These back-to-back crises have not only scarred the investor psyche but also reshaped investment strategies, with a heightened focus on risk aversion and capital preservation.
In the wake of such events, the market has exhibited resilience and signs of a robust recovery, indicative of a new bull market cycle. This includes strong corporate earnings reports, a rebound in consumer spending, and improvements in employment rates. However, the psychological imprint left by the recent past remains potent. Investors, conditioned to expect sudden downturns and economic distress, might be overlooking these positive indicators, their perceptions clouded by the residual fear of instability.
This hesitancy to embrace the potential of a new bull market could also be reinforced by a pervasive media narrative that continues to focus on risks and uncertainties, echoing the trauma of recent years. Such narratives can perpetuate a collective hesitancy to acknowledge the changing tide, as they keep the trauma and fear of recent market crashes fresh in the minds of investors.
Moreover, the concept of “once bitten, twice shy” is particularly pertinent here. Having been through severe market upheavals, investors might be overly cautious, interpreting any market positivity with scepticism. This wariness, while protective, can also blind them to the unfolding reality of a market on the upswing, leading to missed opportunities and a failure to recalibrate their investment strategies in line with a burgeoning bull market.
The collective psyche of investors, still marred by the scars of the pandemic and inflation scares, might be experiencing a form of Stockholm Syndrome, where the fear of returning to a state of crisis overshadows the rational evaluation of current market conditions.
Recognizing and overcoming this psychological barrier is crucial for investors to align with the market’s reality and capitalize on the opportunities of a new bull market cycle.
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