W.I.T. #45 - Investor Sentiment-Market Returns Paradox
Investor sentiment is a commonly cited factor in forecasting stock market returns. That sounds good, but a look at the facts shows a different story.
Three Things Worth Sharing
“Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Systematically you get ahead, but not necessarily in fast spurts….At the end of the day – if you live long enough – most people get what they deserve.”
– Charlie Munger, right-hand man of Warren Buffett in running Berkshire Hathaway, who died on November 28 at age 99
A White Christmas? -This article from the Milwaukee Journal-Sentinel reviews the chances of having snowfall or snow on the ground for Christmas Day as well as various other high & low weather metrics such as the highest snowfall amounts on December 25. It’s a short, fun look back at history; I distinctly remember 1982 because I got a 10-speed bike for Christmas that year and was able to ride it outside that day!
The Most Disrespectful Blocked Shot in Basketball History – It’s worth watching this short clip.
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VIDEO TRANSCRIPT
John Scherer:
John: Is investor sentiment a market indicator worth considering? That's what I am thinking about. You might hear the term investor sentiment in various publications in the news and they talk about are investors optimistic or are they pessimistic about what the future of the market holds? And you know, I've never really paid much attention to that, given that jeez when the herd thinks one way, I tend to be a contrarian and think differently, or hopefully at least independently. And I was recently reading an article and they had a really nice graphic going back 40 years on what investor sentiment has been and sort of overlaid it with the S and P 500 represent US. Stocks. But these greenish areas here bullish that's when investor sentiment is positive in green, investors say, hey, we feel good about the future, and then the blue things that bearish. That's when people feel bad about what they think going forward. And two things really caught my eye as I was looking at this. Again, neat details. John: You can pay attention to what's going on in each of the categories but kind of look over on the left hand side. They're going back to the early two thousand S and take a point from about 1999 2000 on the S and P 500 where that red line is and go forward ten years from 99 to 2008. Sort of a thing some of us can remember the lost decade, right, where the S and P 500 was flat. You can see that in that flat across. And look at the investor sentiment largely over that period, right? Largely bullish in that green area, meaning investors felt pretty good in general, it looks like, over that decade. How'd that turn out for the stock market, right? And keep in mind, as I say this out loud, that the index here, that doesn't include dividends, that doesn't tell the whole story, right? But it tells this is part of the story for sure. The lost decade markets are flat and people felt pretty good about things. Take a look over on the right hand side now, the last five or ten years, a heck of a lot more blue, right? A lot more negative investor sentiment. John: People think that things aren't good in the future. And how does that red line worked out for us the last decade or so, right? Investor sentiment, not so hot. Investor returns substantially up and then go back to that period in the 2000s. Investor sentiment, pretty positive, returns not so awesome. And you can cherry pick different times, just encourage you to spend a little time looking through this. But what I take from this, like what's the takeaway, what's the actionable thing is again, that thinking independently side of things is some people will say when investor sentiment is positive, that means bad things, and when investor sentiment is negative, that means good things. I tend to think in that direction. That may not necessarily be the case as you look at this graphic. John: But what I do take away from this is that investor sentiment might it be a negative indicator or contrarian? Maybe, but it certainly isn't anything that on a reliable basis I look at and go oh, it's something that we really need to take into consideration as we look at what where our expectations of the future are. It's sort of the investor retirement and what market returns do seem to pretty independent to me. So that's what I'm thinking about today. As always interested in knowing what you're thinking about. Drop me a note in the comments if you're watching this on YouTube or shoot me an email directly. And as always, thanks for watching.
John Scherer CFP® is a fee-only certified financial planner based in Middleton, Wisconsin. John has over 20 years of experience advising clients on personal tax, investment, and financial planning. You can reach him by email at john@trinfin.com.