Market sentiment and investor behaviour are vague expressions, often relied on to apply logic at the end of a 'wild' day of stock market moves.
While investor behaviour can appear irrational at times of extreme volatility, it is ultimately a product of fear, greed and learnt behaviour.
Market crises can make an indelible mark on the mindset of investors either due to the memory of losses, the joys of success or the regret of missing out on the upswing.
Investor behaviour learnt during one crisis can be the kernel of the next, and this helps to explain how risk assets will react to a new macroeconomic or geopolitical development.
The coronavirus pandemic continues to impact on the global economy and, by extension, the financial markets.
At the height of the market sell-off during the coronavirus pandemic, there were several unanswerable questions for investors, including, ‘How far would the virus spread?’, ‘How many would die?’ and ‘Could a vaccine be found?’
Ultimately, it was central bank and government intervention that allowed financial markets to look beyond these uncertainties towards the 'greener pastures' of the post-pandemic recovery.
Looking at market behaviour over the past 18 months, we can begin to unpick the impact of the pandemic on this learnt behaviour and the ‘rules of thumb’ that investors adopt to trade in the new normal.
Buy the (brief) dips
The pandemic was a global phenomenon and one that was uniquely pervasive into everyday life. Market participants were thrown at once into a working-from-home environment, as offices and schools closed to try to control the spread of the disease.
Unlike previous crises, Covid-19 disrupted the status quo for almost all market participants and therefore made the crisis personal as well as financial. Given this, it is probably no surprise that on the way down many records were set.
February and March 2020 saw the fastest 30 per cent drop recorded for many major equity indices, with strategists needing to look back to the Great Depression for the closest US comparison.
So widespread was the flight from risk assets that even the US Treasury market was devoid of liquidity for a short period.
While it took until September 2020 for the MSCI (All Country) World index to set a fresh high for the year in price terms, the market spent very little time at its lows and, by June, had recovered most of its March losses.
The speed of the sell-off and subsequent recovery has had a significant impact on investor psychology, which looks back on the lows of March 2020 as a time when investors forgot two of the great post-financial crisis rules of thumb; ‘Central banks will come to the rescue’ and 'Tina – There Is No Alternative (To Equities)’.
Stimulus will come to the rescue
As March 2020 unfolded, each day felt like it saw a fresh round of monetary or fiscal stimulus as authorities reacted to the absence of buyers in most major markets.