Market sentiment is a term often referred too, not only in this blog, but as part of many other pieces of investor commentary. Why is this? When sentiment is low and news is bad, there comes a point when the news must improve and investors look ahead to better times, and vice versa at times of optimism. Investors therefore look to anticipate where the next piece of news is coming from to give equity markets the next move.
The start of the year has not been a bad one, so far, for equity investors, particularly US domestic ones, as the Dow Jones hit new records. Equity prices were generally boosted at the start of the year in anticipation of a more promising outlook for global growth, alongside expectations of a solid earnings season, possibly the two most important factors to equity investors. For this reason, sentiment has likewise improved. Recently equity prices have stalled, the FTSE 100 has pulled back from record highs and now stuck close to 7200. The S&P 500 has been jockeying around or just below 2300, and the Stoxx 50 index around 3250. Is this a consolidation before the next leg up? Or are equity investors waiting for the next piece of news before deciding which way to jump next?
Bond investors have also recently done well ,as the recent optimism for economic growth still does not appear to be reflected in the bond market. Ten year US treasury yields having reached 2.6% at the start of the year have fallen back to trade close to 2.3% on Thursday. Bond investors look to be anticipating the next likely news flow may be slightly less positive.
Merrill Lynch January fund manager survey had protectionism, China and trade wars as the biggest tail risks to equity markets. Despite the upcoming European elections, and the continued need for Greece to receive bailout funds, Europe did not feature, surprisingly. Records apparently show that February is not generally a good month for equity prices, after what is traditionally a good January, so where could the next piece of news come from? It is possible equity markets have discounted growth and earnings, at a time when European risks appeared to have increased. That could suggest equity markets may struggle to find reasons to push on. The flip side of that coin, the amount of equity available to buy shrunk last year, for the first time in history. This is because of companies buying back their own shares, private equity companies are buying listed companies, and combined with a lack of issuance. These opposing forces may be contributing to the recent stalling in developed equity markets.