Individual investors say they are getting more careful, and the S&P/TSX Composite has handed them a fresh reason every few sessions. The mechanism is myopic loss aversion, identified by Shlomo Benartzi and Richard Thaler in a 1995 paper in the Quarterly Journal of Economics: the more often investors check a portfolio, the more often they see a loss, and the less risk they accept as a result.
The American Association of Individual Investors, which polls its U.S. members, reported on Oct. 15 that 41.6% were bearish, against a historical average of 31.5%. Bearish readings have been above average for 36 consecutive weeks. Neutral sentiment, at 19.7%, has been below its 31.0% average for 32 straight weeks, which means fewer investors are sitting in the middle waiting.
Twenty Sessions, One Round Trip
The index closed at 36,335.61 on Sept. 22, fell 3.6% over 11 sessions to 35,041.86 on Oct. 7, then rose 3.7% over nine sessions to 36,324.99 on Oct. 21.
The Oct. 9 label marks the Labour Force Survey showing 68,300 net job losses for September. The Oct. 19 label marks the September CPI release, 3.1% against a 3.2% Reuters poll consensus.
That leaves the index 10.62 points below its Sept. 22 close. Six of the 24 daily changes between Sept. 16 and Oct. 21 exceeded 1%, and the series reversed direction 12 times.
An investor who evaluated a portfolio at the Oct. 7 close was looking at a 3.6% loss from the Sept. 22 level. An investor who evaluated it at the Oct. 21 close was looking at essentially nothing. Benartzi and Thaler argued that investors who evaluate their holdings frequently demand a larger premium for the same volatility, which makes the first investor a more cautious holder of equities than the second even though both own the same index.
A Rate Decision That Keeps Moving the Reference Point
Daniel Kahneman and Amos Tversky showed in their 1979 prospect theory paper in Econometrica that people judge outcomes as gains or losses relative to a reference point, not as final wealth. In October the reference point has been the market price of the Bank of Canada decision on Oct. 28, and it has swung hard.
LSEG data reported by Reuters put the odds of a quarter-point hike at about 25% on Oct. 9, after the Labour Force Survey showed a net loss of 68,300 jobs in September. By Oct. 20, swaps pricing cited by Brown Brothers Harriman strategist Elias Haddad had the odds near 78%, after Governor Tiff Macklem warned on Oct. 16 that the risk of broader, more persistent inflation had increased.
Economists have not moved as far. Five Bay Street economists surveyed by Canadian Mortgage Professional expected a hold as of Oct. 9, and RBC economist Abbey Xu expects the policy rate to stay at 2.25% through 2026. September CPI, released Oct. 19, came in at 3.1% against a Reuters poll forecast of 3.2%. When the market and the forecasters sit this far apart, a hold on Oct. 28 will read as a surprise to one camp and a confirmation to the other, and the reaction will be set by the anchor each investor happened to carry.
Stated Caution and Actual Behaviour Are Different Things
The AAII also asked members how, if at all, they have changed their approach to investing. 35.3% said they had become slightly more conservative and 6.6% said much more conservative, a combined 41.9%. Only 4.9% said they had become more aggressive. A further 32.0% reported no changes and 21.3% reported only modest changes.
The group worth watching is the 35.3%. Slightly more conservative is not a sale. It is a smaller equity weight, a larger cash balance or a delayed contribution, each defensible on the day it happens. Brad Barber and Terrance Odean showed in a 2000 Journal of Finance study of roughly 66,000 U.S. households that the households trading most earned 11.4% a year against 17.9% for the market over 1991 to 1996, which documents the cost of acting on short-horizon discomfort.
Nothing about the October anxiety is irrational. Hike odds moved by more than 50 points in 11 days, and the TSX reversed direction 12 times in 24 daily changes. The behavioural risk is that frequent, reasonable-looking reactions to a noisy signal add up to a portfolio that no longer matches the plan it was built for.