Introduction to Investor Anxiety
Investor anxiety is reaching new heights, with CNN’s Fear and Greed Index plummeting to just three on April 8, marking its lowest level since March 2020, when COVID-19 lockdowns sent shockwaves through financial markets. The index has since made a modest improvement and is sitting at eight. These levels reflect sentiment not seen in over five years. Historically, fear of this magnitude correlates with significant market selloffs.
Understanding the Fear and Greed Index
The Fear and Greed Index is a tool designed to measure the prevailing emotions influencing the stock market by weighing seven key indicators. The index operates on a scale of zero to 100, with a score under 45 indicating fear, a score of 55 and above signifying greed, and one in between marked as neutral. Scores under 25 and above 75 are labeled "extreme fear" and "extreme greed," respectively.
How is the Fear and Greed Index Calculated?
The index aggregates seven key indicators, each reflecting different aspects of market sentiment:
- Stock price momentum: Compares the S&P 500’s current value to its 125-day moving average.
- Stock price strength: Tracks the number of stocks hitting 52-week highs vs. those reaching 52-week lows.
- Stock price breadth: Examines trading volume in advancing vs. declining stocks.
- Put and call options: Analyzes the ratio of bearish (put) options to bullish (call) options.
- Junk bond demand: Measures the yield spread between high-yield (junk) bonds and safer investment-grade bonds.
- Market volatility (VIX): Follows the CBOE Volatility Index, often called the "fear gauge."
- Safe-haven demand: Assesses the relative performance of stocks vs. government bonds.
Recent Instances of Extreme Fear
Understanding past instances of extreme fear can provide insights into current market conditions. The last two notable times the index hit extreme fear were August 5, 2024, and December 19, 2024.
1. August 5, 2024: Global Selloff and Economic Uncertainty
On August 5, 2024, markets saw a sharp decline following weak tech earnings and US employment data, accelerated by an unexpected interest rate hike by the Bank of Japan. This caused a ripple effect across global markets, with Japan’s Nikkei 225 plummeting 12 percent in a single session and the S&P 500 falling over 4 percent amid investor concerns about an economic slowdown.
2. December 19, 2024: Federal Reserve’s Hawkish Stance
Investor fears resurfaced in mid-December 2024, when the US Federal Reserve signaled that interest rates would likely remain elevated longer than expected. The announcement sent shockwaves through the markets, with the US dollar surging to a two-year high and cryptocurrencies taking a hit.
Comparison with Other Fear-Based Indexes
While CNN’s Fear and Greed Index is a popular barometer of market sentiment, it isn’t the only fear-based indicator worth watching. Other major sentiment gauges include the Crypto Fear & Greed Index, which tracks investor sentiment in the cryptocurrency market, and the Doomsday Clock, which reflects global existential risks.
Crypto Fear & Greed Index
The Crypto Fear & Greed Index has also dropped into extreme fear, with a score of 15 on March 4, coinciding with continued geopolitical tensions.
Doomsday Clock
The Doomsday Clock, updated annually by the Bulletin of Atomic Scientists, was at 89 seconds to midnight as of January 28, 2025, signaling heightened global uncertainty.
What Extreme Fear Means for Investors
The plunge of CNN’s Fear and Greed Index into Extreme Fear territory signals widespread investor anxiety. But is this a warning of further declines, or a contrarian buy signal? Historically, moments of extreme fear have often preceded strong market rebounds, as panicked selling creates opportunities for value investors.
Key Considerations for Investors
- Economic Data: Keep an eye on employment reports, inflation data, and GDP growth figures.
- Fed Policy: Interest rate decisions will continue to be a key driver of market sentiment.
- Corporate Earnings: Weak earnings reports could exacerbate investor fears, while strong results may signal resilience.
- Geopolitical Developments: Trade tensions, global conflicts, and macroeconomic policies can shift market sentiment quickly.
Conclusion
While fear-based indicators provide valuable insights, investors should use them alongside fundamental and technical analysis to make informed decisions. Whether this moment marks a temporary panic or the start of a broader downturn remains to be seen, but one thing is clear: investors should be prepared for volatility in the weeks or months ahead. By understanding the Fear and Greed Index, its historical context, and what it signifies for market sentiment, investors can navigate the complex financial landscape with greater confidence.
