“I’ve got a bad feeling about this.”
It’s one of the most recognizable lines from the Star Wars films, famously uttered by Han Solo. For investors navigating recent market turbulence, the sentiment may sound familiar.
Elevated interest rates, oil price uncertainty, persistent inflation, and substantial investment in artificial intelligence (AI) have contributed to renewed volatility and investor unease. When markets decline and negative headlines dominate, the instinct to sell can become powerful. Yet periods of heightened pessimism have often created opportunities for disciplined, long-term investors.
The challenge is distinguishing legitimate investment risks from emotional market reactions.
Measuring the market’s emotional temperature
One widely followed sentiment barometer is the Fear & Greed Index, which combines seven market indicators, including stock price momentum, market breadth, options activity, and demand for safer assets. It ranges from 0, indicating extreme fear, to 100, indicating extreme greed. Readings below 25 signal extreme fear.
Two recent episodes show why these extremes deserve attention.
On April 8, 2025, amid escalating trade tensions, the index fell to a level of approximately three, placing it firmly in extreme fear territory. That day, the S&P 500 closed at 4,983, its closing low for the selloff. From that level, the market advanced 37.4 per cent through year-end.
On March 30, 2026, a similar pattern emerged when the Fear & Greed Index again registered extreme fear, reaching a level of approximately six as the S&P 500 closed at 6,344. By Oct. 30, the benchmark had recovered 19.5 per cent from that low.
These examples do not establish that sentiment indicators predict market bottoms. They demonstrate how quickly the market can recover after fear becomes widespread, and the potential cost of exiting equities at precisely the wrong time.
What 25 years of sentiment data reveal
To look beyond individual episodes, I analyzed 25 years of Bloomberg data from the American Association of Individual Investors (AAII) Sentiment Survey. The weekly survey measures the proportion of individual investors expecting stock prices to rise, fall or remain unchanged over the next six months.
My analysis focused on independent, non-overlapping episodes in which at least 50 per cent of respondents were bearish. The subsequent S&P 500 returns varied considerably by holding period.
Over three months, the index gained an average of 1.7 per cent, with positive returns in 54 per cent of 24 observations. Over six months, the average gain improved to 6.4 per cent, with positive returns in 74 per cent of 19 observations.
The 12-month results were stronger: an average gain of 16.8 per cent, with positive returns in 83 per cent of 12 observations.
The findings highlight an important investment principle. Extreme bearishness did not consistently herald an immediate rebound, but the longer-horizon outcomes were more favourable in my study. I use sentiment as a complement to valuation, fundamentals, and risk management, rather than a standalone buy or sell signal.
The hidden cost of selling into fear
Selling after a sharp decline introduces two risks. The first is crystallizing losses after substantial weakness has already been reflected in prices. The second is the challenge of deciding when to re-enter the market.
Recoveries often begin before the economic news improves. Investors waiting for uncertainty to disappear may miss a meaningful portion of the advance. Even those who correctly anticipated the decline must make a second successful timing decision to benefit from having sold.
Volatility is unavoidable in equity markets. Turning a temporary decline into a permanent loss through panic-driven decisions does not have to be.
Contrarian investing requires discipline, not blind optimism
Buying simply because markets have fallen is not an investment strategy. Sometimes declining prices reflect deteriorating earnings, balance sheets or economic conditions, rather than an exaggerated emotional response.
In my investment process, I distinguish between price declines driven by weakening fundamentals and those driven primarily by sentiment. Earnings growth, valuations, balance sheet strength, and cash-flow generation remain central to that assessment, supplemented by technical and broader market indicators.
Where long-term business prospects remain intact, but valuations have become more attractive, weakness may justify selective purchases. Where fundamentals have deteriorated materially, capital preservation and risk control take priority.
The importance of a broader total wealth plan
A sound total wealth plan helps investors remain disciplined during selloffs. Portfolio allocation and liquidity should reflect retirement income needs, investment horizons, tax considerations, and estate objectives.
For retirees, sufficient cash and fixed income allocations can fund near-term withdrawals without forcing equity sales during downturns. Diversification adds flexibility.
Ultimately, the greater risk may not be the decline itself, but allowing short-term fear to derail long-term objectives. Investment decisions must remain grounded in fundamentals, valuation, and risk management, within the context of each investor’s broader total wealth plan.
