Has the Psychological Impact of COVID Altered Investor Behavior?

We live in confusing times. The outlook for a COVID vaccine has never been more promising. Yet, the number of new cases in the US has never been more dire. This dichotomy has people reeling because they are rightfully frightened while guardedly optimistic.

Consider the tone Pfizer CEO Albert Bourla struck earlier this month when he remarked on the company’s progress towards a vaccine stating, “until now I was thinking if we have a vaccine. Now I’m discussing when we’re going to have a vaccine.” The question of when has never been more pertinent as the total number of known cases in the US reached 4 million in recent days. Meanwhile, new cases worldwide have increased by 35% since the end of June.

The unprecedented nature of the pandemic is powerful enough and pervasive enough to fundamentally change the way people perceive risk. As a result, investors are taking a more defensive stance. This retreat from risk might explain why more investors are embracing gold as part of their portfolio. Recently, gold traded above $1,900 an ounce for the first time since 2011. The increased interest in gold as a mainstay of a well diversified portfolio is evident not only in climbing prices but in the “fear index” created by the Chicago Board Options Exchange (CBOE).

The fear index, formally called the “Volatility Index,” illustrates the market’s expectation of volatility for the next 30 days. Over the last three months the fear index has experienced many intense fluctuations. These dramatic changes are an indication of the angst underpinning many investment decisions. It is no surprise that “a third of Americans now show signs of clinical anxiety” according to research published in The Washington Post.

This anxiety is evident in financial decisions which, in times like these, send even the most stalwart investors to the edge. While this phenomenon is evident in everyday observations, formal research shows that “extreme emotional responses are apparently counter productive from the perspective of trading performance,” according to MIT research. The researchers also concluded that emotions like fear are harmful because they are powerful enough to override higher-level thinking by “short-circuiting” complex decision-making. Today, we are seeing plenty of short-circuiting in the market as investors retreat from their long-term investment strategies in favor of behaviors that offer a sense of short-lived calm.

The effect of this behavior becomes outsized as more investors give in to the impulsiveness often caused by uncertainty. Moreover, it is unlikely that we will see this behavior abate anytime soon. While pharmaceutical companies like Moderna, AstraZeneca, and Pfizer are optimistic about their vaccines, they are hesitant to pinpoint a date for availability. In the meantime, gold continues to fulfill a critical need for investors. Analysts like Eily Ong at Bloomberg Intelligence believe gold could continue its climb well into 2021 “amid rising geopolitical risks in a lower-for-longer interest-rate environment.”

Perhaps the most reassuring aspect of a gold investment is the fact that much of its value is based on its rarity and universally agreed upon value. There is no capricious board of directors, short-sighted CEOs, or fickle managers who can fall victim to the emotionally-driven decisions that are inherent to human psychology.

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