Why is sentiment so important within investment markets?

Even before we saw actual signs of a downturn in the UK economy, with quarterly growth expected to fall from 1.2% to around 0.5%, there was talk in the press of a slowdown which did impact upon sentiment within the UK. But why is sentiment so important to investment markets?

Sentiment is in simple terms the feel-good factor associated with any service, activity for even an item. When the skies are blue and the birds are singing, everybody is happy and we all tend to spend more money on high street and online. This increased spending translates into increased business for the UK economy which improves the unemployment figures, tax income for the government and the overall wealth of the nation.

However, when one of the cogs within the UK economy, in this case sentiment, slows down or stops then it has a knock-on impact higher up the food chain. Without positive sentiment investors will hold back on their stock market purchases, house buyers will sit on the sidelines waiting for prices to fall and unfortunately sellers will come to the fore to take advantage of current prices rather than wait for tomorrow's price. It is very easy to see why very quickly sentiment can impact upon the economy and even become a self-fulfilling prophecy in some cases.