How Fear and Uncertainty Affects The Stock Market
by Connor Lounsbury | August 20, 2021
The sight of losing money causes emotional reactions amongst investors. If something such as bad news or poor earnings comes into the eyes of investors, it will cause them to sell some or all of their investment. The market as a whole or a specific stock can be affected by fear and uncertainty.
What is Fear?
Fear can be defined as an emotion caused by the belief something is going to be lost, dangerous, or threatening. In regards to the stock market, fear is caused by the belief money is going to be lost. The belief of losing money can be kickstarted from things such as the media and poor company financials.
What is Uncertainty?
Uncertainty can be defined as a state of incomplete confidence or being unsure of something. Uncertainty is triggered by fear. When fear surfaces, the general market and/or specific stocks will begin to go down in price. When uncertainty strikes, investors begin to panic sell. Panic selling is selling an investment, whether it be stocks, real estate, etc., because of a sudden drop in price caused by fear. When people panic sell a stock, they are uncertain if the stock will ever return to a given price.
The Media
Broadcast media, print media, and internet media can all heavily influence the direction of the stock market or a specific stock. Let's take a real-world example. Afghanistan has been taken over by the Taliban. This brings fear into a lot of investors. Due to this fear, people begin to start selling, changing the overall direction of the market. Investors will notice this change, causing uncertainty to arise. They will be uncertain if the general market will continue to rise for the time being and continue to sell their stock positions.
Let's take a look on how the market was affected by Coronavirus in 2020. As COVID-19 was making its way into other countries and the United States, the world-wide economy was massively affected. Millions of people lost their jobs and companies were unable to operate at full efficiency due to the lockdown. Because of these horrible events, fear and uncertainty struck many investors. The stock market plummeted throughout the duration of February and March 2020.
Fear and Greed Index
In the stock market, the opposite of fear is greed. There is an indicator that will show what emotion most investors are acting off of at any given time. Click here to check it out. Generally, when fear is the emotion driving investors to make decisions, stocks will go down. The effects are the opposite when greed is the emotion driving investors, stocks will be propelled upwards.
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