West Texas Intermediate has moved 2% or more in a single session on 13 of the 19 sessions between September 9 and October 5. The S&P/TSX Composite has not recorded a single 2% day in the 33 sessions since August 17, and its largest daily move in that span was a 1.6% decline. The loud series and the quiet one are telling investors two different stories, and behavioural finance research says the quiet one is the more dangerous.
The TSX closed Friday at 35,502.65, which is 3.9% below its August 25 close of 36,957.63. One day earlier, on October 1, it closed at 35,154.76, 4.9% below that mark. Neither number is dramatic. Both are the kind of number that shapes how a portfolio statement feels.
The Availability Heuristic Keeps Oil on the Screen
Amos Tversky and Daniel Kahneman described the availability heuristic in a 1973 paper in Cognitive Psychology: people judge how likely or how important something is by how easily examples come to mind. A $100 oil price is easy to bring to mind. A TSX that moves 0.6% on a typical day, the median absolute daily move since August 17, is not.
WTI closed at or above $100 on five sessions between September 10 and September 17, then fell to $89.22 by October 5, a 12.9% retreat from the $102.48 peak close. Over the same stretch the TSX moved from 35,506.28 on September 10 to 35,502.65 on October 2, a change of less than 0.02%. Oil did the work of a headline. The index did not.
The median absolute daily move in WTI over that span was 2.4%, four times the TSX figure. WTI rose above $100, fell back, returned to $100 and then slid below $90 without settling, and that price path is the one most likely to be repeated in conversation, even when it explains little of what happened to a client account.
WTI closed at or above $100 on five sessions between Sep 10 and Sep 17, then lost 12.9% from the Sep 10 close of $102.48 by Oct 5. The series uses the continuous front-month contract, so the Oct 5 figure differs from the November contract quoted by some outlets.
Loss Aversion Works in Quiet Markets Too
Kahneman and Tversky, in their 1979 prospect theory paper in Econometrica, showed that people evaluate outcomes as gains or losses against a reference point rather than as final wealth. In a 1992 follow-up in the Journal of Risk and Uncertainty, Tversky and Kahneman estimated the median loss aversion coefficient at about 2.25, meaning a loss is weighted roughly 2.25 times as heavily as a gain of the same size.
For many holders of Canadian equities the reference point is the last high they remember. The TSX has closed below its August 25 level on every one of the 27 sessions since, and the index fell 4.9% from that close to the October 1 trough. A 3.9% shortfall does not trigger a headline. It does register as a loss against the reference point, and loss aversion says that registration is heavier than the same-sized gain would be.
The TSX has recovered 19.3% of its peak-to-trough decline. The index has moved lower in a slow slide rather than a break, which is the shape that gives investors time to reassess without ever giving them a single event to blame. The TSX closed below the August 25 peak on all 27 sessions that followed.
The index closed below its Aug 25 level on all 27 sessions that followed, a 4.9% drop to the Oct 1 trough, of which the Oct 2 close recovered 19.3%. The shaded band marks the Sep 10 to Sep 17 sessions when WTI closed near $100.
Consensus Comfort and Myopic Loss Aversion
The wider backdrop is calm at the surface. Yahoo Finance reported on October 5 that the S&P 500 rose Friday to within 1% of its record high, even with bond yields at more than 20-year highs, after a weak jobs report lowered expectations for a Federal Reserve rate hike this year. The Bureau of Labor Statistics reported payroll growth of 29,000 jobs for September. The 10-year U.S. Treasury yield sat near 5.3% on October 5.
Sean McLaughlin, chief options strategist at All Star Charts, told Yahoo Finance: "The market has had every reason to sell off, and it hasn't sold off yet, and to me it feels like it's running out of time." FactSet data show 60% of S&P 500 stocks now carry a Buy rating from Wall Street analysts, the highest level on record. A consensus that comfortable gives investors social proof that nothing needs to change, which is the setup for herding.
Shlomo Benartzi and Richard Thaler, in a 1995 paper in the Quarterly Journal of Economics, named the combination that matters here: myopic loss aversion. Investors who check results often experience more losses, and so demand more compensation for holding risk. A market that oscillates in a 4.9% band gives a frequent checker many small losses to count and few clean gains.
Terrance Odean, in a 1998 Journal of Finance study of retail brokerage accounts, found investors realized 14.8% of their paper gains but only 9.8% of their paper losses, the disposition effect. In a market where all 27 of the latest closes sit under the August peak, the pull to hold what is down and sell what is up has plenty to act on. The Bank of Canada policy rate is 2.25% and the Government of Canada 10-year yield was above 4% on October 1, so cash and bonds are competing with equities for attention at the same time.