By Debra Taylor, CPA/PFS, JD, CDFA™
If history tells us anything about investing, it’s that markets never rise in a straight line. As much as all investors would prefer calm periods of steady returns, this simply isn’t how markets work. Instead, investors need to navigate alternating periods of exuberance and gloom, not only across the biggest bull and bear markets (such as the 2008 financial crisis and the decade-long expansion that followed), but also over shorter time frames (such as the past year). History shows that focusing on broader patterns while anticipating short-term choppiness can increase the likelihood of achieving financial goals.
Shifts in investor sentiment occur because markets are forward-looking, try to anticipate unknown outcomes, and incorporate this information into prices today. In doing so, the market may often over- or undershoot. Of course, many investors know this all too well after experiencing the last three years. What’s unfortunate is that this has led some to become discouraged which, in the worst case, may lead them to be poorly positioned for future opportunities.
However, there are signs that investor sentiment is now improving after falling to
historic lows last year. Until recently, poor investor sentiment was partly driven by big issues such as a historic inflationary environment that hasn’t been seen in over 40 years, the possibility of a recession, and the risk of a policy mistake by the Fed. However, it was also driven by large reversals in areas such as tech, crypto, and consumer discretionary spending, frustrating many investors who chased short-term gains.
Indeed, how many feel about markets is often driven by what the market has
recently done. The latest data from the AAII Investor Sentiment Survey show that while 38% of respondents are neutral on the stock market, bullish attitudes are now outpacing bearish ones by 12%. This is no doubt driven by the improved market environment over the past few months, during which the S&P 500 has climbed 14% since October. In this way, sentiment is often a backward-looking indicator.
The bottom line? Investor sentiment is improving due to the rally of the past few
months, but be careful of allowing your emotions to get the better of you. As
Warren Buffet famously said, “Be fearful when others are greedy and greedy when others are fearful.” In other words, sometimes the best time to invest is when you feel the worst.
As always, please reach out with any questions.