Tracking investor sentiment is key to gauge market outlook and trends

My outlook for 2024 called for a good-to-great year, and the 4.8 per cent global returns until February 27 speak to just that.

Stocks always move most on the gap between reality and expectations, so gauging the latter is key to any outlook.

There are hard ways to assess this. But also easy ones anyone with web access can do. Today, easy or hard, both methods reveal dourness dominates – paving the bullish road forward.

Investor Sir John Templeton once said: “Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.”

Recent years are examples:

After 2020’s market recovery from Covid lockdown lows – itself born in despair – sentiment warmed unusually fast in 2021.

Frothy pockets emerged in speculative assets like cryptocurrency and special purpose acquisition company initial public offerings, making stocks susceptible to negative surprises.

Then came Ukraine, inflation, central bank rate hikes, supply chain chaos and more. This led to small-sized bear market in 2022.

Yet, by October 2022, long-running fears drove irrational pessimism, ushering in the positive surprise that birthed this bull market.

Now, sentiment has warmed somewhat – to scepticism.

The Bank of America’s February fund manager survey revealed the most bullishness since January 2022, while many other surveys show similar outlooks.

Yet, bears take this too far, arguing that we fast-forwarded to optimism … even euphoria!

They point to stale fears like the Israel-Gaza war and eurozone economic weakness as “evidence” investors are too cheery, setting stocks up to fall – while claiming only a handful of stocks (the Magnificent Seven) underpin this bull market.

But the fact is nearly a third of global stocks lead the world in the year-to-date.

So, how can you see sentiment relatively clearly? One tough way my company does, but you probably can’t replicate, is illustrative: Plotting professional sentiment bell curves.

Wall Street forecasts both reflect and influence sentiment. My company collects dozens of them from everywhere.

The aim is to reveal which outcomes are widely expected and discussed … and which aren’t. This doesn’t reveal what will happen – stocks pre-price common forecasts and do something different.

But it shows what people think will happen and hence is already priced in stocks – a sentiment signal.

Out of 54 professional S&P 500 2024 forecasts, 40 cluster between 2.9 per cent and 9 per cent returns – while nine see declines worse than 3 per cent. None see returns exceeding 17.1 per cent.

The greater prevalence of lacklustre or negative returns than double-digit gains show you sentiment is not near euphoria. It is middling at most.

The relative void above 10 per cent suggests above-average gains. All this is hard to do.

There are easier tools you can use. One: Track how economic data compares to estimates.

You can check consensus forecasts for global gross domestic product, inflation, employment, purchasing managers’ indexes and more.

Then, compare the results to the expectations. Are they worse than expected?

Then, sentiment is probably too optimistic.

Recently, most key data are trending above estimates – thanks to lingering inflation and recession fears.

Another way: Consider IPOs.

US and European issuances are up from last February, and analysts see more ahead.

But issuance remains muted overall – revealing scepticism, maybe some optimism but certainly not euphoria.

Many companies issuing shares lately use the proceeds to retire costlier debt.

Plus, today’s IPOs are more established – think ARM and Shein – unlike 2021’s speculative Spacs.

Nothing euphoric there. Whether you choose easy or hard methods, tracking sentiment is key. Today, it all signals more gains ahead.