Why Stock Prices Mirror Our Mood

You’re not the only one who wakes up feeling stressed at 2 A.M. In the middle of the night, even on Christmas, Google searches for the term “anxiety” spike. Moments later, searches for “Bars Open Near Me,” “How To Meditate” and “How To Roll A Joint,” surge. Impulsively, we look for ways to calm our fraying nerves. Interestingly too, searches for “Am I fat?” “Am I ugly,” and “Am I stupid?” also rise. Our self-critical, mean voice naturally comes out to play when we feel stressed.

While the reflexive nature of our feelings of confidence, our actions, and our stories appears straightforward and logical when captured in small, isolated moments like this, we routinely overlook that this three-dimensional dynamic occurs consistently throughout our lives, individually and especially in groups.

Nowhere is the ever-changing equilibrium between our fluctuating mood, actions, and stories more transparent than in the financial markets. What we buy and sell every day has everything to do with how we feel and the stories we tell. Stock prices are a real-time barometer of investor sentiment.

Behind every investment decision we make is a story—not just about a business or an industry but about the future. We won’t willingly buy shares in a company if we imagine trouble ahead. And by imagine, I mean it in its most creative sense of the word. While our decisions may be grounded in projections and forecasts of revenues, earnings, and other objective financial measures, any time we talk about the future, we must imagine it. We must come up with a story that captures what we believe to be ahead.

And here is what may surprise you: If you track the stories investors and the financial media share, you’ll see that they are far better reflections of how we feel now than they are accurate predictions of the future. They explain what we think will happen, not necessarily what will happen. As the financial markets show over and over, often those two can be very different.

Take the COVID-19 pandemic. Three years ago, you could watch our imagination crumble as our confidence fell. As the outbreak unfolded, the stories we told ourselves and others about what was ahead became bleaker and bleaker. In fact, search volume for the term “coronavirus” was all but mirrored by a comparable decline in stock prices. As investors panicked, and felt more and more vulnerable, they swapped the unpredictability of stocks for the certainty of cash. And at the late-March 2020 lows in confidence, everyone believed things could only get worse and was acting on those feelings and stories—including business leaders and policymakers. There was a clear equilibrium between our shared feelings of powerlessness and uncertainty, market narratives and our actions. With that, market prices precisely mirrored how bad we felt. The stock price of travel related companies like Carnival Cruise Line and American Airlines, for example, collapsed while shares of pizza delivery company Dominoes soared on the expectation that we would be forced to stay home indefinitely.

At the other end of the sentiment spectrum, in early 2021, we saw the reverse. With a mass vaccination effort underway and consumers flush with cash from Washington D.C., there was renewed excitement about innovation and the economic growth it would bring. Not a year from the pandemic outbreak, investors stampeded into cryptocurrencies, SPACs, meme stocks, and other highly speculative, abstract investments certain that their future would be blisteringly bright. As you would expect, the prices of these instruments, too, mirrored the extreme confidence investors had in that imagined future. Shares of EV maker Telsa were up ten-fold from their pandemic lows while shares of hydrogen fuel cell company Plug Power were up twenty-fold.

More recently, we’ve seen a similar surge in AI-related stocks, as investors’ extreme belief in those companies’ bright futures has led to a flood of cash into the shares of the likes of Nvidia, Microsoft, Google, and Apple, as well as a swirl of small start-ups. Once again, feelings of invulnerability—and the intense certainty that investors have that these companies will not only transform the future but be the greatest beneficiaries of that change—have been mirrored by riveting stories and high stock prices.

Most investors make their worst decisions when market prices are at their extreme and the accompanying market narratives mirror investors’ either dour or ebullient mood.

At lows, the stories we tell ourselves—and that are often being repeated by the financial media more broadly often in “Markets in Turmoil” specials—caution that “things will only get worse.” We extrapolate the intense uncertainty we feel far into the future and race to sell. With that, we demand what we feel is most concrete: cash. Conversely, at peaks, we do the reverse. Feeling invincible, we see an “unstoppable” bright future ahead and dive in. We crave abstract possibility. We don’t want to miss out on what’s coming. Moreover, as confidence rises, we naturally scrutinize our decisions less. As a result, we take our greatest risks while paying the least amount of attention. And it isn’t just us. The same is true for the companies we invest in. At peaks in confidence, they, too, wildly invest in the most abstract opportunities. The result is an echo chamber in which invulnerability paired with seductively optimistic stories draws everyone in.

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You would think we would learn, but at extremes in sentiment it is hard for us to avoid the simple, loud, powerful narratives that are widely shared. We have to sell at the bottom. To do otherwise would go against everything we feel and hear. Meanwhile at the top, as we watch others celebrate the money they’ve made, while we sit cautiously on the sidelines, we feel weak and ashamed. In the middle of the night, we stare at the ceiling wondering whether we are the one who is stupid.

We can improve our investment decision-making by paying closer attention to market sentiment, investor narratives, and what the crowd is rushing in and out of. They offer important clues about what is likely to be ahead. Moreover, if we know one element, we can deduce the other two. While the specific nature of what we buy changes, the three elements—and their equilibrium—is all but certain to remain consistent.

At their core, market cycles are nothing more than a trolley car ride from feelings of defeat to invincibility, from stories of hopelessness and great peril ahead to extraordinary possibility and a blisteringly bright future, and from a panicked rush into cold, hard cash to a race into wild, abstract dreams. And back.

In either direction, when the car gets loud and crowded, it’s best to prepare for a sudden reversal.

This article has been adapted from The Confidence Map: Charting a Path from Chaos to Clarity by Peter W. Atwater. Copyright © 2023. Available from Portfolio, an imprint of Penguin Random House LLC.