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What Are Panic and Exuberance?

Market panic and exuberance both describe investor behaviors that drive certain financial cycles. Exuberance occurs when investors bid up asset prices regardless of underlying fundamentals. By contrast, panic occurs when investors sell on fear, rapidly driving valuations lower. 

🤔 Understanding panic and exuberance

Panic and exuberance are common components of the market cycle. However, they often contribute to market volatility that can spell trouble for investors’ portfolios. 

They may produce buying opportunities as some assets trade below their “intrinsic values.” But they can also tempt investors to time the market by buying troughs and selling peaks, resulting in greater losses. 

Unpacking panic in stocks

Market panic occurs when an event or rumor triggers a massive sell-off in a particular company, sector or market. This often leads to price declines that trigger “panic selling,” where investors shed assets to preserve capital. In turn, this drives prices down further and encourages more investors to sell. 

Causes of panic in stocks

Market panic is often triggered by events that investors believe will negatively impact their portfolios, like: 

  • Disappointing company earnings
  • Unfavorable industry or monetary policies
  • Nation- or worldwide events, such as the Covid-19 pandemic

Risks of market panic

Once panic sets in, investors may try to protect themselves with stop-loss orders or sell out to cover margin calls. Unfortunately, these actions typically further, rather than halt, the panic spiral. 

Additionally, panicked markets can tempt some investors to attempt day trading or market timing. Unfortunately, since it’s impossible to identify the best buy and sell points until they’ve passed, such activities generally incur more losses than gains. 

Unpacking stock market exuberance

Market exuberance occurs when investors drive an asset’s price far above what its fundamentals justify. Exuberance is most common during periods of high optimism when investors believe that a bull run will continue indefinitely. (Or at least, won’t end yet.) 

This line of thinking may encourage investors to purchase assets at high prices or take risks they can’t afford. 

Risks of stock market exuberance

Exuberance is particularly troublesome because it can produce asset bubbles, such as the dot-com bubble or 2008 housing bubble. But when the bubble bursts, investors may panic and rush to lock in losses to “protect” their remaining capital. They may also miss future gains if they fail to reinvest before the market recovers. 

And, if the bubble is big enough, these effects can ripple into other asset classes or even contribute to recessionary environments. 

What this means for you

Market panic and exuberance can lead to incredible market volatility with potential for both gains and losses. While panic encourages investors to cash in losses, exuberance tempts investors to purchase assets well above their valuation. 

But instead of sweating the swings on your own, we have a better idea: Let do it for you. With our AI-powered Investment Kits, you can rest easy knowing that our algorithms carefully analyze market performance, fundamentals and more to keep you invested as wisely—and calmly—as possible.

Disclosures is the trade name of Quantalytics Holdings, LLC., LLC is a wholly-owned subsidiary of Quantalytics Holdings, LLC ("Quantalytics"). Quantalytics offers automated financial advice tools through Quantalytics Investment Advisors, LLC ("QAI"), an SEC-registered investment advisor. QIA’s investment advisory services are ONLY available only to residents of the United States. Disclosures concerning QIA’s investment advisory services are available on its Form ADV filed with the SEC. The content in this newsletter is for informational purposes only and does not constitute a comprehensive description of's investment advisory services.

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