Real GDP & Real Private GDP

Sentiment Snapshot: Fundamental Fear

In this article we explore how starkly sentiment has shifted on the fundamentals outlook.  From the heights of euphoria at the beginning of last year, there now seems to be a deepening sense of fear on the fundamentals outlook.  Bears will say it’s the end of the cycle and this is exactly to be expected, and bulls will say it’s just a passing growth scare and investors have gone overboard in the swing from euphoria to dysphoria.

Q4 hedge fund letters, conference, scoops etc

Real GDP & Real Private GDP

geralt / Pixabay

Firstly, for context, in the Sentiment Snapshot series I look at some of the charts and data from the weekly survey on Twitter, which asks respondents to indicate whether they are bullish or bearish for primarily technical or fundamental rationale.  I also add a few other charts from time to time when it helps explore a certain theme.

The key takeaways from the weekly sentiment snapshot are:

  • Equity fundamentals sentiment is the most bearish on record.
  • Bond investors are just as excited about the fundamentals backdrop, but in reverse.
  • There has been an enormous and resolute reset in sentiment now vs this time last year.
  • It’s entirely possible that the ‘bull market in pessimism’ is overdone.

1. Fundamentals vs Technicals Sentiment:  The latest results showed a further deepening of pessimism on the fundamentals, while previous bullishness on technicals flipped to the bearish side even as the S&P500 managed to hold the 2800 level after stumbling late last week.  Though the survey has only been running since mid-2016, this is the most pessimistic on record that respondents have been on the fundamentals outlook.

Fundamental Fear

2. Bonds vs Equities “Fundamentals” Sentiment:  Comparing equity fundamentals sentiment to bond fundamentals sentiment, it’s a very similar picture (note: bond fundamentals sentiment has been inverted to align with the economic logic that bonds benefit from weaker economic conditions).  Both equity and bond investors are in agreement: the fundamentals (macroeconomic?) outlook is bad and getting worse.

Fundamental Fear

3. Fundamentally Irrational?  One thing that stood out to me in the surveys is the path of bullish vs bearish readings on equity fundamentals… for most of the survey history the two series moved very closely together, yet recently the drop in ‘Bullish (fundamentals)’ has not matched the surge in ‘Bearish (fundamentals)’.  I wonder if this disconnect reflects a certain excess of pessimism on the fundamentals outlook…

Fundamental Fear

4. A Bull Market in Pessimism:  And speaking of pessimism, there’s basically a bull market in pessimism here.  This chart shows the combined scores of Bearish (fundamentals) for equities and Bullish (fundamentals) for bonds.  As you can see, we’re in uncharted territory here.  Fear has taken over on the outlook (weaker PMIs, inverting yield curve, geopolitics, etc etc).  It is genuinely going to be interesting to see how this plays out, as to whether this bull market in pessimism is well justified, or a sign that the slowdown has nearly run its course.

Also worth highlighting on this chart is the record low in mid-January last year (which was about when the PMIs and global stock markets actually peaked).

Fundamental Fear

5. From Euphoria to Dysphoria:  With the final chart (which shows the Euphoriameter), I wanted to highlight how starkly things shifted on the sentiment front from January last year, to January this year – it was a complete turnaround from euphoria to dysphoria.  This chart mirrors some of what we saw in the previous chart, and history seems to show that risk is lower when pessimism is higher.  Should a crisis or recession take hold, that statement will go out the window, but for now for stocks to go higher there is indeed a wall of worry to climb.

Fundamental Fear

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Article by Top Down Charts

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