Market sentiment is the general view of investors towards the market. This is the combined view of all investors at any one time. Since this is not static but always changing, market sentiment is usually seen in three general categories: extremely optimistic (bullish); extremely pessimistic (bearish); and neutral or equal in number of optimists and pessimists. The view of market participants can be based on either fundamental or technical reasons. Market sentiment is seen as moving the main indices, which will push individual stocks in its wake. For example, a company might not be a great stock, but if the market sentiment for the overall index is extremely bullish, this optimism will push up the price of most if not all stocks. Many view extreme market sentiment readings as a contrary indicator, when most people are bullish (optimistic), this is close to a short-term top and vice versa.
One of the biggest dangers when it comes to long-term investing is trying to determine the potential hazards on the horizon. Currently, market sentiment has become extremely positive in the market, driven by strong corporations with lean organizations and plenty of cash.
However, to be successful at long-term investing, we must look past current market sentiment conditions and determine what potential pitfalls could arise. Pension funds within corporations are becoming a serious threat in their potential to dampen market sentiment in the long run.
The deficit for American pension funds—the difference between the amount owed to retired workers and the level of funds in the pension—increased at the end of 2012 to $295 billion, up 17% from year-end 2011, according to Towers Watson. (Source: Badawy, M., “Corporate pension funding down in 2012 on falling interest rates,” Reuters, April 23, 2013.)
While assets within the pension plans have increased, as the stock market has moved higher, interest rates have declined to such a level that it still leaves a huge funding gap. Market sentiment for the current state of corporations might be accurate, but long-term investing is all about what will happen down the road. At some point, these obligations do have to be paid one way or another.
According to Towers Watson, American corporations contributed $45.0 billion in 2012 to their pension plans, the largest amount during the past five years. Since the turmoil in the market in 2008 and 2009, many pension plans have shifted away from equities and toward fixed income. According to Towers Watson, since 2009, the equity portion of the average pension plan has declined by … Read More
One of the most dangerous periods for an investor is when they become too complacent. As the combined view of all investors, market sentiment ends up becoming overly bullish, running far ahead of the fundamentals. This has now occurred in several sectors, but one that investors should be aware of is in bank stocks, especially in Europe.
Bank stocks around the world have risen tremendously, pushed higher by a wave of positive market sentiment. The general consensus is that following the financial crisis over the last few years, the worst is over. I would caution investors that there are still significant hurdles for many global bank stocks.
Recently, the Bank of England stated that many investors are underestimating potential risks. As we all know, the global economy is still weak, yet share prices have soared, including bank stocks. Market sentiment has shifted from massively bearish to extremely positive over the past couple of years.
As the minutes of the Bank of England’s last meeting note, the committee recommended that bank stocks in the U.K. raise an additional $38.0 billion for potential pitfalls related to the euro area as well as their real estate exposure. (Source: Moshinsky, B., “BOE Says Investors May Be Taking ‘Too Rosy’ a View of Stresses,” Bloomberg, April 5, 2013.)
Investors have piled into bank stocks with positive market sentiment on the belief that the worst is over, especially in Europe. Many bank stocks within Europe are closely intertwined with other nations on that continent. As we’ve just seen from the recent Cyprus fiasco, there are still significant pitfalls ahead.
Market sentiment is clearly being pushed upward … Read More
The S&P 500 continues to remain at extremely elevated levels, with many professional and retail investors looking for a market sell-off. What is surprising is that the S&P 500 has risen in spite of general market sentiment that hasn’t become overly bullish.
New data from Bloomberg show that the S&P 500 has moved up towards analysts’ estimates to such a level that the market is approximately five percent away from the mean forecast. This is the closest the S&P 500 has gotten to Wall Street estimates in the last seven years, with the historical difference normally around 14%. (Source: Rupp, L. and Gammeltoft, N., “U.S. stocks fall as American manufacturing index slips,” Bloomberg, April 1, 2013.)
What this means is that the S&P 500 has exceeded the current market sentiment and has continued to rise. At this point, either the S&P 500 has gotten far ahead of the underlying fundamentals, or market sentiment will turn even more bullish, as analysts begin to increase their expectations for this year.
Not only are the pros lagging the market, most retail investors are also underinvested in the market. While there has been a definite shift from cash and money market funds to the S&P 500, the vast majority of investors have not enjoyed the S&P 500’s massive upward move.
Two things will occur: either retail investors will look to buy into the S&P 500 on a correction, or the future pullback will indicate a far greater sell-off, as market sentiment shifts into negative territory.
Fundamentally, recent data continue to show conflicting evidence for the U.S. economy. The Institute for Supply Management’s factory index … Read More
The recent pullback in gold has certainly unnerved long-term investors. It has also seen a dramatic shift in market sentiment. However, recent data shows that this shift in market sentiment has primarily come from shorter-term institutional funds.
When considering gold as an investment, one must consider the timeframe as well as the underlying participants in the market. Market sentiment for every asset class oscillates from overly optimistic to overly pessimistic. The goal for the long-term investor is to use this volatility to accumulate during overly pessimistic times and take profits during overly optimistic times.
According to Barclays PLC (NYSE/BCS), gold-based exchange-traded funds (ETFs) are set to record the weakest month on record. Barclays notes that during the period of February 20–25, the net outflow of gold from exchange-traded products (ETPs) totaled 10 metric tons per day. The vast majority of gold redemptions stem from the SPDR Gold Shares (NYSEArca/GLD) ETF, with a decline of 58 metric tons for the month of February. (Source: Saefong, M., “Gold ETP flows set for weakest month on record: Barclays,” MarketWatch, March 1, 2013.)
While physical gold continues to remain in demand (as we’ve seen central banks around the world, including Russia and China, continuing to accumulate), market sentiment for paper gold has recently become negative.
The net level of institutions investing in long-term gold at the Comex is the lowest since December 2008, and new funds are going to short the gold market. This is becoming a classic battle between the bulls and bears regarding market sentiment for the gold market.
Physical gold is a slower, more long-term market than paper gold. Institutions favor … Read More
When it comes to making contrarian investments, going against market sentiment might be difficult at first. But the key is to focus on long-term fundamentals with the thesis that corporate earnings will move substantially higher as long as fundamentals strengthen.
One sector that has had quite a bit of negative market sentiment for the past couple of years has been uranium and nuclear power. Following the Fukushima disaster in Japan, nuclear power was put on halt for many nations around the world.
This negative market sentiment was reflected in lower uranium prices and significant hits to corporate earnings for companies in this sector.
However, recent information shows that nuclear power is once again gaining favor, and market sentiment could begin to shift earlier than many people believe, with corporate earnings benefiting from higher demand.
China is by far the leader in construction of nuclear power plants. In 2010, Chinese nuclear power plants had 10 gigawatts of capacity; it is now estimated that officials want this capacity increased to 130–140 gigawatts by 2030. (Source: The Economist, January 19, 2013, last accessed February 28, 2013.)
Following the Japanese disaster, China halted further nuclear construction. However, in October 2012, the Chinese State Council once again approved a number of projects. With over 25 nuclear reactors under construction, China’s nuclear power program is by far the largest in development by any nation.
Corporate earnings in the nuclear power sector have suffered due to the negative market sentiment following the Japanese disaster. The loss of life was truly tragic.
The current Chinese administration realizes that with the massive amount of pollution occurring in metropolitan areas, … Read More