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

The political and economic uncertainty that has sent U.S. stocks reeling in recent weeks is making it difficult for investors to predict when stocks will find their footing.

Retail investor activity suggests we’re in the third of five psychological phases of a typical market downturn, according to analysts at Vanda Research.

“Retail behavior around equity market drawdowns looks a lot like an abbreviated version of Kübler-Ross’s Five Stages of Grief model,” analysts Marco Iachini and Lucas Mantle said in a report released Thursday.

The sell-off in U.S. stocks intensified on Thursday, sending the benchmark S&P 500 index into its first correction since October 2023. The recent rout has been fueled primarily by uncertainty around President Donald Trump’s on-again, off-again threats to impose tariffs, which economists say could spur inflation and weigh on economic growth.

The 5 Stages of Stock Market Grief

The Vanda analysts break down the stages and their characteristics in the following way:

1. Denial: Retail investors “buy the dip” as analysts argue fundamentals remain strong. 
2. Anger: Some retail investors begin to capitulate, and often blame external forces (e.g., bad Fed policy, geopolitics, algorithmic trading).
3. Bargaining: Retail investors begin to accept the downturn, and wait to sell amid relief rallies. Funds rotate into defensive stocks. 
4. Depression: Market sentiment hits rock bottom as investors capitulate and draw comparisons to past crises. 
5. Acceptance: Volatility subsides as investors begin to reallocate to quality stocks at a discount. 

So Where Are We Now?

Retail trading suggests we’re currently in the bargaining phase, say Iachini and Mantle. Retail investors bought a near-record $1.85 billion of U.S. stocks on “DeepSeek Monday,” according to Vanda Research data. They bought another $1.55 billion a week later when Trump first imposed tariffs on Canadian and Mexican goods. These, Iachini and Mantle argue, were denial-driven “buy the dip” moments. 

Markets may have entered the “anger” phase in February when retail investors scaled back their buying as volatility increased amid tariff uncertainty. 

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. 

The next phase, theoretically, is “depression,” and Iachini and Mantle say some indicators suggest we’re already there; investor sentiment has turned overwhelmingly bearish, according to a weekly American Association of Individual Investors survey. But contrary to typical “depression” behavior, retail investors haven’t trimmed their equity exposure all that much, according to Vanda data.

Institutional investors, meanwhile, are trading like bears. Iachini and Mantle note the last time that happened—in August 2024—improving economic data and encouraging signaling from the Federal Reserve revived bullish sentiment before retail investors followed suit. 

“The jury is still out on whether today’s sell-off will follow a similar pattern,” they wrote. “A lack of a credible macro (growth) put will shift our focus squarely on retail flows for signs of a market bottom.”