Fear and Greed

Often, I go on about sentiment, looking for signs of greed or, more likely, fear coming to extreme levels, as this is often a good trigger to buy. Obviously, it’s fair to say that February brought its fair share of fear. March and April have seen sentiment improve as stocks have recovered. US stocks are once again reaching all-time highs, helped by a strong earnings season, indications that the US economy remains resilient, and the ongoing focus on AI.  Outweighing stagflation and geopolitical fears. Has all this led to an overwhelming sense of greed? The AAII retail investor survey indicates neutral sentiment, while the CNN Fear & Greed Index is just into greed territory but well away from extreme.  The Vix is just below its historic average.

The best 2 monthly sentiment surveys, to my mind, are the S&P Global IMI Survey and the Merrill Lynch Investor Survey. Sometimes, surveys, despite being in theory drawn from the same pool of professional portfolio managers, can yield quite different outcomes, so it’s worth comparing them. Both surveys are conducted roughly at the same time.

The latest Merrill Lynch survey suggests respondents’ biggest concerns remain stagflation, rising prices and weaker growth, although they consider a recession unlikely. Geopolitical risks are their biggest tail risk, so it would appear they are all reading the FT’s front page. Remember, at the start of the year, those polled in this survey were uber-bullish, with all their chips on the table. Not so much now, Global equity allocation has been cut to a net 13% overweight, down sharply from 37% in March. However, overall sentiment seems roughly between greed and fear.

What about the S&P Global survey? Well, a similar picture, I would say. Growth and inflation concerns are high on the agenda, and long commodities seem to be a common theme. Whereas the ML survey saw a reduction in risk appetite in March, S&P believes there has been a modest increase. As with the ML survey, both risk appetite and near-term market expectations remain sharply below levels seen at the turn of the year. My conclusion is that we remain somewhere between fear and greed for now.

We have all been hearing about the rise in government bond yields in the past weeks. The 10-year US Treasury yield is now approaching 4.5%, and the 20-year is over 5%. The equity risk premium is the additional return one should expect for the additional risk of owning equities relative to bonds, and it’s usually around 4% in the US. It is currently almost zero. This should, at some point, become a barrier to the equity rally if yields continue to rise.

Rachael Reeves warned today of market chaos should a challenge to Kier Starmer become apparent, which it appears to have done. So far, the reaction has been pretty muted; the pound fell a bit, the 10-year gilt yield actually fell to 5%, and the equity market rallied. The latest GDP report wasn’t as good as the headlines suggested, but the underlying numbers were better than expected.