BOSTON (TheStreet) -- The earthquake off Japan and concern over the safety of its nuclear power plants pummeled stocks last week.This week, investors have jumped back into equities, fearing the worst of the disaster is over. The fear-driven sell-off, however, may be keeping investors from taking full advantage of the rebound to come, says Chris Blum, chief investment officer of the behavioral-finance platform at JPMorgan's ( JPM) asset-management unit. In behavioral finance, this is known as "recency bias," focusing more on current events than long-term prospects. JPMorgan, the second-largest U.S. bank by assets, has the biggest risk exposure of any U.S. bank in Japan, according to Bloomberg. The New York-based bank has $1.3 trillion in assets under management. Historically, consumer sentiment lags the market rebound following such events, and the S&P 500 has typically recovered by the time consumer sentiment finally turns around. Blum points out that the University of Michigan's Consumer Sentiment Index traditionally bottoms at the very point the S&P 500 spikes upward. Gains following events like the depression, World War II, the oil crisis of the 1970s, and the one-two punch of the Internet bubble bursting and so-called war on terror have been significant once there was upward momentum. Investors, Blum says, tend to price in their panic and you see a lot of "shooting first and asking questions later." Blum says investor reticence in times of crisis is understandable -- "we are all wired that way." Compounding current sentiment is that the earthquake is yet another troubling moment in the roller-coaster of recent history. Investors have felt that it's been "one step forward, two steps back." "Certainly, over the last couple of years, events have been more unusual than not," Blum says. "There was the worst financial crisis we've had, arguably, since the Great Depression and we've had other events that have happened since that, the aftershocks of the financial crisis, whether it's been the flash crash last year, the sovereign debt crisis and, this year, the situation in the Middle East and the unfortunate events in Japan. Investors may feel fatigued. All that being said, that tends to be the best time to purchase things."
Waiting for various scenarios to play out or resolve may be a typical gut instinct, but one that can have a negative result, according to Blum. "Investors tend to be late to the game and wait for more clarity before they start buying risky assets," he says. "The reason value investing works is that you have to embrace the element of uncertainty to get that extra return. If you wait for total clarity, you don't get that opportunity. When you see these panic sell-offs, these mini-crises, so to speak, it's tough to go in there and purchase stocks." --Written by Joe Mont in Boston. >To contact the writer of this article, click here: Joe Mont. >To follow the writer on Twitter, go to http://twitter.com/josephmont. >To submit a news tip, send an email to: firstname.lastname@example.org. Get more stock ideas and investing advice on our sister site, Stockpickr.com.
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