What happens when sentiment is shocked?

Posted by: Paul Donovan

14 Feb 2020
  • Financial markets like sentiment surveys. They come out regularly. That gives traders and journalists something to talk about. They have lots of different categories. That gives an illusion of detail.
  • One challenge is that sentiment surveys may reflect emotions more than facts. Economists call this "social desirability bias". People often answer the way they think they are expected to answer. That is not always the correct answer. The media can influence this. Dramatic stories in the media change sentiment surveys.
  • The United States suffered four dramatic terrorist attacks in September 2001. The disasters dominated the media. The US air network shut down. Businesses had additional security. Shops were empty. The central bank provided cash. There was an expectation of fiscal stimulus. In October, US business and consumer sentiment collapsed.
  • The US economy did not collapse. The plunge in business and consumer sentiment was not matched by reality. Surveys were answered the way people thought they should be answered. The real economic data shows that the answers given were wrong.
  • When something dramatic happens in the world, investors need to be cautious about sentiment. Modern media is more sensational. That makes for less reliable sentiment measures. This is worth remembering in the next couple of months.

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