The wall of worry still seems high enough to deter retail investors as Lipper fund services report this week that retail investors continue to sell equities in favour of money market funds. How sentiment has changed from the start of the year, as the question remains how long will one of the longest bull runs in history keep going? A question that has been debated for almost as long as the run has been going. The answer may lie in the next 12-18 months if some analysts are correct. If the Federal Reserve continues to tighten interest rates modestly, if inflation continues to pick up and economic growth is sustainable then equities should continue to perform, Goldilocks will be still eating porridge. On the other hand, if, as some forecast, US interest rates do continue to rise, and growth does soften then the much-anticipated top may be closer.
On Tuesday we had a series of Euro-area economic data points, the second estimate for economic growth in the first quarter was unchanged from the first estimate of 2.5%. The ZEW survey of 300 “experts “from a broad range of financial services are asked their opinion on a broad range of economic indicators and this is translated into an index reading. Sentiment has been falling in the past few months, and as we have demonstrated in the past this index tends to work well as a contra-indicator for equity markets.
Going back to our first point, fundamentally timing of corrections, notoriously difficult. Discussing this amongst our colleagues one referred to a series of alternative indicators that investors look at as potential indicators for changes in market sentiment. All of which are fundamentally indications of risk appetite. One, we would favour less, is the price of gold and the S&P 500, the theory being if equity prices rise far faster than gold then risk appetite is stretched. Ahead of the last bubble, the price of gold in dollars was one-fifth of the S&P 500, today with gold at 1300 dollars and the S&P 500 just over 2600, that number is closer to two. Other indicators are cyclical outperforming defensives, an extreme in either direction could represent either extreme caution or visa versa. Discretionary spend over non-discretionary spending likewise. Currently, only one measure is possibly looking stretched discretionary over non-discretionary. One thing to bear in mind with charts, they can often be distorted by time, and over what period you choose.