Can the '5 Stages of Grief' Predict When the Stock Sell-Off Will End?

The stock market is a rollercoaster of emotions, and right now, it feels like we're in free fall. The S&P 500 tumbled into correction on Thursday, and the sell-off has been fueled by uncertainty around President Donald Trump's tariffs. But can the '5 Stages of Grief' model, as applied to retail investor behavior, help us predict when this sell-off will end?

The '5 Stages of Grief' model, developed by Vanda Research, provides a psychological framework for understanding how investors react to market downturns. The stages are denial, anger, bargaining, depression, and acceptance. By tracking retail investor behavior, we can gain insights into where we are in the cycle and when the market might bottom out.



Let's break down the stages and see how they apply to the current market environment.

1. Denial: Retail investors "buy the dip" as analysts argue fundamentals remain strong. This was evident when retail investors bought a near-record $1.85 billion of U.S. stocks on “DeepSeek Monday,” and another $1.55 billion a week later when Trump first imposed tariffs on Canadian and Mexican goods. These were denial-driven “buy the dip” moments.

2. Anger: Some retail investors begin to capitulate, and often blame external forces (e.g., bad Fed policy, geopolitics, algorithmic trading). Markets may have entered the “anger” phase in February when retail investors scaled back their buying as volatility increased amid tariff uncertainty.

3. Bargaining: Retail investors begin to accept the downturn, and wait to sell amid relief rallies. Funds rotate into defensive stocks. Vanda data suggests retail investors started selling during relief rallies in late February, a sign the “bargaining” mentality was prevailing. Concerns about slowing economic growth have encouraged a rotation into the Magnificent Seven and out of small caps, another sign investors are bargaining, not capitulating.

4. Depression: Market sentiment hits rock bottom as investors capitulate and draw comparisons to past crises. Investor sentiment has turned overwhelmingly bearish, according to a weekly American Association of Individual Investors survey. However, contrary to typical "depression" behavior, retail investors haven’t trimmed their equity exposure all that much, according to Vanda data.

5. Acceptance: Volatility subsides as investors begin to reallocate to quality stocks at a discount. The last time institutional investors traded like bears—in August 2024—improving economic data and encouraging signaling from the Federal Reserve revived bullish sentiment before retail investors followed suit. This pattern suggests that acceptance and recovery may follow a similar trajectory.



The current political and economic uncertainty, particularly the tariff risks, is influencing the progression through the stages of grief by creating a cautious and uncertain environment. The market is currently in the bargaining phase, with investors waiting to sell during relief rallies and rotating into defensive stocks. The eventual market bottom will likely be influenced by retail investor behavior and the resolution of the tariff risks.

In conclusion, the '5 Stages of Grief' model provides a unique psychological perspective on retail investor behavior, which can complement traditional market cycle analysis in predicting the end of a stock sell-off. While traditional analysis focuses on technical indicators and market fundamentals, the grief model offers insights into the emotional journey of investors, which can be a valuable tool for predicting market movements. So, keep an eye on retail investor behavior and sentiment—it might just give us a clue as to when this sell-off will end.