Why is there such a disconnect between investor sentiment and market data? - J.P. Morgan Asset Management

Why is there such a disconnect between investor sentiment and market data?

Contributor Samantha Azzarello

Most recent macroeconomic and market data are very strong: Q1 S&P 500 earnings growth is expected to clock in at 25%, almost every country in the world is showing positive manufacturing momentum and global GDP growth has been revised upwards in 2018. Nonetheless, the sentiment data from individual investors do not seem to reflect this.

While there are always concerns in markets – both new and old – including an overactive Fed, the age of the bull market or trade skirmish uncertainties, the pessimism (or rather, lack of optimism) in markets seems unjustified. The U.S. expansion is set to continue, particularly with a near-term boost from fiscal stimulus. This should provide a backstop for the bull market to continue, albeit slower than in previous years. All-in-all, the data are too positive to avoid risk assets.

The American Association of Individual Investors (AAII) survey suggests that a plurality of investors feel “neutral” toward stocks. At the same time, “bullish” sentiment has fallen significantly since the start of the year. On the other side of the spectrum, “bearish” sentiment is up from the start of the year and now outweighs “bullish.” Whereas investors before felt optimistic, now there is much more uncertainty.

What could be the cause of this perceived disconnect?

While it’s hard to pinpoint the drivers of investor sentiment, two connected things come to mind: first, the fact that we are late cycle, and second, the vengeful return of volatility (which fosters an edge-of-the-seat mentality around the cycle coming to an end). But investors should put these things into context: this “late cycle” could be sticky, long and drawn out like the broader cycle, and the return of volatility was expected given its recently depressed level. Overall, no one can call the end, and being invested for the long-term (perhaps with a quality bias across asset classes and a thoroughly diversified approach) is key.

The bulls have become bears

Source: American Association of Individual Investors, J.P. Morgan Asset Management. Data are as of May 9, 2018.

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