"The Five Stages of Grief in the Stock Market" Enters the Third Step: Where is the End of the Sell-off in the U.S. Stock Market?

According to the Zhitong Finance APP, in recent weeks, political and economic uncertainties have caused significant fluctuations in the U.S. stock market, making it difficult for investors to predict when the market will stabilize. Analysts at Vanda Research indicate that the behavior of retail investors suggests we are currently in the third psychological stage of a typical market downturn.

Analysts Marco Iachini and Lucas Mantle stated in a report released on Thursday: "The behavior of retail investors during the stock market decline resembles a simplified version of the Kübler-Ross 'Five Stages of Grief' model."

On Thursday, the sell-off in the U.S. stock market intensified, with the benchmark S&P 500 index entering a correction territory for the first time since October 2023. The recent stock market crash has primarily been driven by the uncertainty caused by President Donald Trump's erratic threats of increased tariffs. Economists say this could trigger inflation and drag down economic growth.

Analysts at Vanda Research have broken down the stages of the "Five Stages of Grief in the Stock Market" and their characteristics as follows:

1. Denial Stage: Analysts insist that the fundamentals remain strong, and retail investors are "buying the dip."

2. Anger Stage: Some retail investors begin to concede defeat and often blame external factors (such as the Federal Reserve's poor policies, geopolitical issues, and algorithmic trading).

3. Bargaining Stage: Retail investors start to accept the market downturn and wait for selling opportunities during a rebound. Funds shift towards defensive stocks.

4. Depression Stage: Investors concede defeat, comparing the current market to past crises, and market sentiment hits rock bottom.

5. Acceptance Stage: As investors begin to reallocate quality stocks at discounted prices, market volatility tends to ease.

Which Stage Are We In Now?

Iachini and Mantle indicate that retail trading conditions suggest we are currently in the Bargaining Stage. Data from Vanda Research shows that on "DeepSeek Monday," retail investors bought nearly a record $1.85 billion in U.S. stocks. A week later, when Trump first imposed tariffs on Canadian and Mexican goods, they bought another $1.55 billion in stocks. Iachini and Mantle believe these are driven by a denial mentality of "buying the dip."

In February of this year, as tariff uncertainties led to increased market volatility, retail investors reduced their buying volume, and the market may have entered the Anger Stage.

Data from Vanda Research indicates that in late February, retail investors began selling stocks during the rebound, which is a sign that the Bargaining mentality is prevailing. Concerns about slowing economic growth have prompted funds to shift from small and mid-cap stocks to the "Big Seven Tech Stocks," which is another indication that investors are bargaining rather than conceding defeat entirely.

Theoretically, the next stage is the Depression Stage. Iachini and Mantle state that some indicators suggest we are already in this stage; the weekly survey from the American Association of Individual Investors shows that investor sentiment has become extremely pessimistic However, Vanda Research data shows that, unlike typical "depression" phase behavior, retail investors have not significantly reduced their stock holdings.

At the same time, institutional investors are behaving extremely cautiously. Akiny and Mantle pointed out that the last time this occurred was in August 2024, after which economic data improved and the Federal Reserve released positive signals, restoring market optimism before retail investors followed suit.

They wrote: "It remains to be seen whether the current sell-off will follow a similar pattern. In the absence of reliable macro (growth) support, we will closely monitor retail fund flows as a signal for market bottoming."