Yahoo Finance What's happening in market sentiment is a 'healthy situation': strategist
So far this year, it hasn’t taken much of a blow to knock investor sentiment back down after bubbling up – and that’s a good sign for stocks, according to at least one strategist.
“Recently, you did start to see some real extremes in terms of optimism, particularly in behavioral measures of investor sentiment in mid-January,” Liz Ann Sonders, chief investment strategist for Charles Schwab, told Yahoo Finance on The Ticker. “And then you got that kind of knocked down a bit with the onset of the coronavirus.”
The S&P 500 pulled back just over 3% between Jan. 17 and Jan. 31 as coronavirus cases escalated, unwinding some of the index’s year-to-date gains and briefly turning it negative on an intraday basis.
While ultimately short-lived, that pullback acted as a reset button on investor optimism. bringing sentiment measures back down “at worst to neutral,” Sonders said.
“What I think is unique in this recent period of time is, it doesn’t take much of a pullback in the market to bring back some of that euphoria,” Sonders said. “And I think that has been, at least in the near-term, a stabilizing force.”
‘An interesting animal’
A quick recalibration in investor sentiment has been a hallmark of trading over much of the past decade, with optimism remaining well-contained even amid a steady march higher in the S&P 500, Sonders said.
“Sentiment’s been an interesting animal really in this entire bull market, arguably up until the beginning of 2018,” Sonders said. “Sentiment really never got to anything resembling euphoria, which I think is one of the reasons why this has been such an elongated bull market. It’s been climbing that wall of worry. There was sort of the default position of skepticism.”
For a brief period in 2018, that trend did start to shift, however. The S&P 500’s 19% return in 2017 coincided with a record-low year for volatility, pushing investor sentiment higher through the start of 2018. That reversed in February 2018 when the Cboe Volatility Index, a widely tracked gauge of near-term volatility for the S&P 500, skyrocketed to a more than two-year high of 50.3 before sharply receding to 24.4, roiling market participants that had bet against volatility.
Signals of a repeat of that incidence, however, appear to be off the table for now, according to Sonders. And indeed, last week when the S&P 500 rose 1.6%, investors returned to net selling after four straight weeks of buying, according to a report from Bank of America, indicating an absence of overwhelming exuberance as buying cooled.
“I’d rather have it be that way than, say, in the late 1990s, where no matter what the news was, no matter what the market did, investors were in that euphoric mode,” Sonders said. That time, that euphoria ultimately led to the dot-com crash at the turn of the century.
“This time is different. It’s a new paradigm,” Sonders said. “So that skepticism that comes back more quickly is actually a relatively healthy situation.”
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Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck
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