Market Jitters Meaning Market Psychology Example

Market Jitters Meaning Market Psychology Example

Market Jitters: Meaning, Market Psychology, Example

What Are Market Jitters?

"Market jitters" is an elevated state of anxiety and uncertainty about the economy or a specific asset market.

Market jitters can indicate that the stock market is due for a pullback or correction. This can lead to a repricing of risk or a significant economic downturn.

Key Takeaways

"Market jitters" refers to increased anxiety and uncertainty among market participants.

Unpriced risk, economic shocks, and negative market psychology all contribute to market jitters.

Market jitters can lead to a flight to safety into low-risk assets, but can also be advantageous for investments and trading strategies that benefit from high volatility.

Understanding Market Jitters

Market jitters occur at the turning point of a bull market or stock market rally. Negative economic shocks, unexpectedly bad economic data, or poor corporate earnings reports increase market volatility and signal trouble in the financial markets.

When markets experience jitters, it can indicate the need for a correction. Investors may reassess their portfolios and consider adjusting their asset allocation. Market jitters can also result in significant flows into and out of different global asset classes.

Markets dislike uncertainty. Market jitters involve both risk and uncertainty. Efficient markets handle risk well, but uncertainty is harder to price accurately.

Economists use measures of asset price volatility, forecast dispersion, and media mentions of uncertainty-related terms to estimate uncertainty in an economy. Elevated measures indicate episodes of market jitters.

Market Psychology

Psychological factors play a role during periods of heightened uncertainty and can lead to high volatility and market instability. Keynesian economics refers to these as "animal spirits" due to their perceived irrationality. In a worst-case scenario, market jitters can lead to pessimism and setbacks.

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During market jitters, investments and trading strategies that withstand or benefit from volatility can be advantageous. However, they can also fail dramatically if investors make incorrect judgments. Market jitters also trigger flights to safety, as investors seek lower-risk assets.

Example of Market Jitters

In the first half of 2018, the U.S. stock market experienced market jitters due to fears of the Federal Reserve’s interest rate hikes and quantitative tightening. These concerns led to concerns about an economic downturn and sell-off in the bond and stock markets.

Adding to their fears was the flattening of the yield curve and the widening of the LIBOR-OIS spread, a measure of stress in the banking sector. These market jitters resulted in a spike in the VIX, the Cboe Volatility Index for the S&P 500, also known as the "fear index."

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