Stock market sentiment: early 2019 brings a rebound after December’s despair

Investors’ view of the world became more optimistic in January – but how long will it last?


Christopher Lewis

Christopher Lewis

Head of Investment Strategy

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The stock market is akin to a manic depressive, according to legendary investor Warren Buffett.

He was referring to the market’s tendency to swing from exuberance to deep negativity, and his comparison seems pertinent in the context of recent months.

Up to the end of January, global equity markets staged a V-shaped recovery, with the MSCI AC World index returning 4.5% following the notable sell off during the fourth quarter of 2018.

Over this period we have seen sentiment - as measured by the American Association of Individual Investors (AAII), a widely-followed indicator of individual investors’ mood - move from an extremely bearish reading in December back to a three month optimistic high by the end of January.

The reversal was driven by solid US economic data, better than expected corporate earnings, a dovish shift in the Federal Reserve’s forward guidance and signs that a potential fiscal stimulus in China might avoid a meaningful economic slowdown.

How positive are US private investors feeling?

(AAII Net position of positive/negative sentiment)

Source: AAII, Bloomberg 

As a result of the recovery in share prices the dislocation which opened up between equity market valuations and economic fundamentals has now disappeared.

The valuations of a majority of global equity indices are now back to either in line or slightly above 15 year average levels on a price to earnings basis. Whilst we continue to see some attractive value opportunities, broadly we expect equity market returns for the rest of the year to be more modest.

Despite the more supportive environment for shares and other risk assets, there are a number of  key political and macro economic risks which could test recently improved investor sentiment leading to bouts of volatility. Notable examples are upcoming deadlines for Brexit and a US China trade deal.

“Resistance level” may limit future market gains

There seems to be a relatively significant “resistance level” forming for the S&P 500 index around its 200 day moving average price. At the time of writing the market is already at or close to that level – around 2,750.

A “resistance level” is determined by trading patterns and marks a specific price or point in the index where selling will kick in and prevent the market from rising higher. Only a strong surge of optimism is likely to break through this barrier.

Without any such surge, or if we see sentiment weaken, it may be the case that continued selling pressure will see the US equity market fail to make much progress beyond this level.

While investor sentiment can help explain shorter-term market moves, our equity strategy remains grounded by both valuations and our fundamental outlook.

While global economic growth is slowing, we are not expecting a recession in the next 12 months. We were comfortable maintaining our equity allocation throughout the fourth quarter, and this has proved to be beneficial to returns at the start of the year.

We remain happy with the existing equity weighting across portfolios.


Christopher Lewis

Christopher Lewis

Head of Investment Strategy

Chris joined in 2010 and is Head of Investment Strategy. He has an undergraduate degree in History from Cambridge University as well as a Graduate Diploma in Business and Management from the Judge Business School and holds the CISI Masters in Wealth Management.

The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Limited 12 Moorgate, London, EC2R 6DA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored. 

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