Retail optimism a cause for concern?

Nerves were possibly calmed at the start of the week as Janet Yellen, the ex-Federal Reserve Chair and now secretary of state to the Treasury gave a positive view of her opinion of the current state of the US economy, post-Fridays jobs report. Janet Yellen is still in soft landing mode. Later on Wednesday, we get the monthly Consumer Price Index, hopefully the latest indication that the US inflation rate is getting ever closer to the 2% target. Then, on Thursday, the ECB will more than likely take interest rates lower by another 25 basis points as the euro area economy continues to struggle. The German economy is an ongoing victim of the slowdown in the Chinese economy. However, there was a little ray of Sunshine as exports from China as exports rose for the 5^th consecutive month, although imports softened.

It cannot be denied that the US stock market is not the cheapest, but it is also the most attractive, and therein lies the dilemma. Nowhere else can you get exposure to the most influential companies in the world. Price is what you pay; value is what you decide.

If one looks for tell-tale signs, sentiment remains dangerously optimistic. The AAII retail investor sentiment index reports that 45% of retail investors are confident the US market will be higher in 6 months compared to where it is now, with just 24% being bearish. The other chart I saw was the level of household exposure to equities as a share of their financial assets, courtesy of the Wall Street Journal and JP Morgan, would appear to be at an all-time high. One can see that this chart reinforces the view that when households get overly exposed to equities, it can be a signal we can be close to the top. Look at 2000 and 2007. Retail investors are often quoted as the last in and the last out. What is possibly surprising about this chart is the level of exposure at a time when US treasuries provide a credible alternative.

The first and possibly not the last presidential debate took place last night, and Kamala Harris, according to at least a poll on Bloomberg radio, came out on top. We shall see how much weight the debate will have as the election goes on.

Stocks look to open again in negative territory ahead of the CPI report later today. Wall Street dragged lower as JP Morgan issued a cautious comment for the outlook to earnings in the coming quarter.