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The S&P 500 tumbled into correction on Thursday as stocks continued to sell off amid growing concerns about tariff risks.
Retail investor activity suggests we’re in the third of five psychological phases of a typical market downturn, according to analysts at Vanda Research.
A disconnect between investor sentiment and behavior has widened in recent weeks; individual investors feel extremely bearish but have reduced their equity exposure only slightly.
The political and economic uncertainty that has sent U.S. stocks reeling in recent weeks is making it difficult for investors to predict when stocks will find their footing.
Retail investor activity suggests we’re in the third of five psychological phases of a typical market downturn, according to analysts at Vanda Research.
“Retail behavior around equity market drawdowns looks a lot like an abbreviated version of Kübler-Ross’s Five Stages of Grief model,” analysts Marco Iachini and Lucas Mantle said in a report released Thursday.
The sell-off in U.S. stocks intensified on Thursday, sending the benchmark S&P 500 index into its first correction since October 2023. The recent rout has been fueled primarily by uncertainty around President Donald Trump’s on-again, off-again threats to impose tariffs, which economists say could spur inflation and weigh on economic growth.
The Vanda analysts break down the stages and their characteristics in the following way:
Denial: Retail investors “buy the dip” as analysts argue fundamentals remain strong.
Anger: Some retail investors begin to capitulate, and often blame external forces (e.g., bad Fed policy, geopolitics, algorithmic trading).
Bargaining: Retail investors begin to accept the downturn, and wait to sell amid relief rallies. Funds rotate into defensive stocks.
Depression: Market sentiment hits rock bottom as investors capitulate and draw comparisons to past crises.
Acceptance: Volatility subsides as investors begin to reallocate to quality stocks at a discount.
Retail trading suggests we’re currently in the bargaining phase, say Iachini and Mantle. Retail investors bought a near-record $1.85 billion of U.S. stocks on “DeepSeek Monday,” according to Vanda Research data. They bought another $1.55 billion a week later when Trump first imposed tariffs on Canadian and Mexican goods. These, Iachini and Mantle argue, were denial-driven “buy the dip” moments.
Markets may have entered the “anger” phase in February when retail investors scaled back their buying as volatility increased amid tariff uncertainty.
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