When Sentiment Hates Reality

Pessimism is en vogue on Wall Street and Main Street these days when it comes to markets and the economy. How do I know this? Well, all one needs to do is look at the latest batch of sentiment surveys to see the pessimistic picture quite clearly.

For example, CNBC recently reported that the Bank of America Fund Managers survey shows 82% of respondents believe the global economy will weaken, which was a 30-year low. And when you consider that over the past few decades we’ve been through the “Great Financial Crisis” and the Covid-19 pandemic, well, you get a sense of just how negative the sentiment in this survey has become.

Of course, there are many other survey metrics reflecting that same fear. For example, the American Association of Individual Investors, or AAII, Sentiment Survey now shows just 28.5% of respondents are bullish. That is the lowest level since October 2022. Moreover, when you consider the historical average for bulls is 37.5%, you can see how downbeat sentiment has become.

Another increasingly popular sentiment measure is the CNN Fear/Greed Indicator. That number currently sits at 19% (on a scale of 0-100), which is in the “Extreme Fear” range. The Fear/Greed Index has become more widely followed on Wall Street because it incorporates seven different momentum and sentiment indicators, and, as such, provides a wide view of current investor and market sentiment.

Then there is the Investors Intelligence Advisor Sentiment Survey, which currently reflects a Bulls/Bears spread of -11%, which is an extremely bearish reading. The Investors Intelligence Advisor Sentiment Index is similar to the AAII survey, but it polls financial advisors, not individual investors. Now, it is very unusual for the Bulls/Bears spread to be negative (more bears than bulls). In fact, this is lowest bulls/bears spread since fall 2022, although it remains above the absolute low of -19%.

So, based on the survey data, things are looking pretty bad for the markets and the economy. But — and this is a big but — what does the actual hard economic data say about what’s happening right now?

Let’s take a look at some of the recent data, which was compiled courtesy of the very smart professionals at Sevens Report Research.

First, we have the National ISM PMIs, which are showing solid activity and are not reflecting a slowdown. The ISM Services PMI remained above 50 in its latest reading, implying that activity in the service sector is still expanding (a number above 50 indicates economic expansion). Now, after spending a few months in expansion territory, the manufacturing PMI did decline slightly under 50 (to 49), but that’s not a materially negative number considering the volatility in the manufacturing sector right now.

The next piece of hard data here is consumer spending, which also remains resilient. Retail sales metrics were quite good in March ($636.52 billion up from $627.90 billion the prior month), pushing back on the idea that tariff threats and policy chaos would restrain consumer spending. Now, you might argue that the boost in retail sales data was driven mainly by increased car purchases following tariff threats, and that is true. However, other core measures of consumer spending remained solid, and we are not seeing any negative consumer anecdotes from the credit card companies on spending trends.

In addition to retail sales data, we have business spending, which is also remarkably stable. New orders for non-defense capital goods excluding aircraft (NDCGXA) is the best metric we have for national business spending and investment, and so far, there has not been the steep decline that we’d expect given all the tariff chaos ($74.99 billion versus $74.52 billion the prior month). Of course, that can change in the coming months, but as of now, it is not happening.

Then there’s employment data, which remains broadly resilient. Monthly job adds remained solid in March, while jobless claims (215,000 in March versus 225,000 in February) stayed very low and are nowhere near levels we’d expect during an economic slowdown. The bottom line here is that the labor market is not deteriorating.

The conclusion to draw here is that there is a definite disconnect between the overly pessimistic sentiment data and the actual hard data. Now, to be fair, normally when sentiment tanks, the hard data follows it relatively quickly. That may indeed happen in the months to come, but it hasn’t happened yet and it isn’t happening right now.

The important takeaway here for investors is that this divergence between sentiment and actual data is worth consideration, because if the negative effects of pessimistic sentiment on equity prices fade, then getting into this market now while its well off its all-time highs might indeed be that grandiose “buy-the-dip” opportunity you’ve likely been waiting to take advantage of with your long-term investment capital.

You see, when sentiment hates reality, the market can become ripe for a very big rebound — so consider yourself forewarned.

***********************************************************

Resist Much, Obey Little

To the States or any one of them, or any city of the States, Resist

much, obey little,

Once unquestioning obedience, once fully enslaved,

Once fully enslaved, no nation, state, city of this earth, ever

afterward resumes its liberty.

–Walt Whitman, “To the States”

Written in 1860, on the precipice of the Civil War, the originally titled, “Walt Whitman’s Caution” was later titled, “To the States.” I love this poem, because in just a few short words, Whitman captured the danger of blind and unquestioning obedience to a central authority.

I recommend this sentiment with everything you do in life. Don’t be afraid to question those in power, be they political power, clergy, academia, etc. We are all fallible, and we all must constantly be questioning those in power, especially if what they say doesn’t seem commensurate with reality.

Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.

In the name of the best within us,

Jim Woods