Sometimes a shrug is as telling as a stampede. Sterling barely budged on Thursday, currency traders unmoved by another good set of economic data — UK shoppers spent much more this August than they did in the same month last summer.
“If we hadn’t had Brexit, and we’d had these numbers, I would have thought we’d have people clamouring for interest rates to go up,” says Gerard Lane, chief investment officer for Artorius, a wealth manager.
The reaction highlights the mystery of market signals, how one of the stranger aspects of finance is the way hard-nosed investment decisions are grounded in cold analysis of facts and figures, but also require empathy: how does the rest of the market feel about it?
For instance, there is some evidence sunny days tend to produce rising stock markets. Although the effect may be too small to form the basis of an investment strategy, it does suggest a link between good mood and rising markets.
As with anything so mercurial as sentiment, however, cause and effect can require interpretation. A 2003 working paper from the Federal Reserve Bank of Atlanta suggested a relationship between the effect of solar flares on the earth’s magnetosphere, psychic conditions on the surface and stock prices a week later.
“People affected by geomagnetic storms may be more inclined to sell stocks on stormy days because they incorrectly attribute their bad mood to negative economic prospects rather than bad environmental conditions,” it mused.
People affected by geomagnetic storms may be more inclined to sell stocks on stormy days because they incorrectly attribute their bad mood to negative economic prospects rather than bad environmental conditions
– 2003 Fed Paper
More widely followed are surveys of investor opinion, for the simple reason they can highlight extremes. If there were 100 investors in the world and they all owned a lot of US stocks, but very little UK equity, it would take significant new information to lift American share prices. British shares would rally on a small piece of good news, by comparison.
So February was the moment to buy emerging markets, risky debt and assets related to raw materials when concern about the prospects for China were at a peak.
Now, however, stock and bond markets seem to lack either overriding fear or enthusiasm.
“At a time when some markets are very overvalued, and at a time when central bank policy is doing things that are somewhat unusual, there is a larger than normal paranoia about financial markets,” says Michael Harnett, strategist for Bank of America Merrill Lynch.
At a time when some markets are very overvalued, and at a time when central bank policy is doing things that are somewhat unusual, there is a larger than normal paranoia about financial markets
– Michael Harnett, Bank of America Merrill Lynch.
The bank publishes a popular monthly survey of investors. Perhaps unsurprising with some interest rate regimes below zero, the most popular investments are those with reliable income such as investment grade bonds, while the most hated might be the shares of Japanese banks.
Yet Mr Harnett notes he does not get many questions on the economic outlook these days. “The biggest bear market out there is in conviction. There is more slavish following of positioning and sentiment and flows, because there is a lack of conviction.”
In the UK, Lloyds employs a polling company to conduct a monthly online survey of the views of the public, investing and otherwise, to help inform decision-making.
The strongest view in evidence from recent polls is perhaps the hardest to do anything about, given it reflects the reality of central bank action to suppress interest rates.
“We are in extremes for cash,” says Markus Stadlmann, chief investment officer for Lloyds Private Bank, with the balance of respondents viewing cash negatively rather than positively at more than 40 per cent.
Beyond surveys, flows into and out of mutual funds are closely watched, as are the balance of bets using option contracts in some markets.
Aggregate performance of groups of investors can also be compared to indices, to see if they are embracing or rejecting particular markets.
In addition to those indicators, Nikolaos Panigirtzoglou, strategist at JPMorgan, assesses how stock and bond markets react to so-called economic surprises — when data come in above or below the consensus of economist forecasts. Last month, the movement was muted.
“People just don’t have a strong opinion,” he says. It isn’t that everyone is complacent, rather it seems likely some are while others are nervous, so balancing out.
Of course, the problem with looking at multiple indicators comes when they point in different directions.
“Which one are you going to listen to? Usually it’s based on the narrative,” says Tobias Levkovich, US equity strategist for Citi Research. Investors can choose whichever indicator fits with their own mood.
Instead, he feeds nine separate indicators into a bespoke Panic/Euphoria Model. When the dial moves into panic mode, it is time to buy and vice versa. “It’s kind of neutral at the moment,” he says.
Instead, what is notable is the speed at which the sentiment needle twitches across the dial. “Two weeks ago, it was on complacency,” he says. “Even two or three years ago, it wouldn’t happen in a week, it would take three or four. Now there is just this speed.”
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