Investment Clock insights

A w-shaped recovery?


Trevor Greetham

26 November 2018

The re-test of recent lows on Wall Street has sent our investor sentiment index back down into deep panic territory (chart 1). Interestingly, US retail investors are now at their most bearish since the worst point of the Feb/March panic, which is a positive sign from a contrarian point of view. It is also reassuring to see that US company directors are still strong buyers of shares in their own companies, something that usually suggests a strong earnings backdrop.
We have been buying stocks on weakness over the last few weeks and now have a sizeable overweight position in the Royal London Global Multi Asset Portfolios. We expect the economic expansion and the bull market to continue into 2019, albeit with higher volatility than in previous years. The sharp drop in the oil price has reduced stagflation fears and acts as a tax cut on global growth. Meanwhile, China is stimulating its economy and the US remains solid. 
A bear market could start some time in the next year if higher US interest rates start to bite and we are very much aware of the short term risks. But with sentiment so depressed and stock market seasonality turning positive (chart 2) we think it’s time to say the glass is half full, not half empty.

The re-test of recent lows on Wall Street has sent our investor sentiment index back down into deep panic territory (chart 1). Interestingly, US retail investors are now at their most bearish since the worst point of the Feb/March panic, which is a positive sign from a contrarian point of view. It is also reassuring to see that US company directors are still strong buyers of shares in their own companies, something that usually suggests a strong earnings backdrop.

We have been buying stocks on weakness over the last few weeks and now have a sizeable overweight position in the Royal London Global Multi Asset Portfolios. We expect the economic expansion and the bull market to continue into 2019, albeit with higher volatility than in previous years. The sharp drop in the oil price has reduced stagflation fears and acts as a tax cut on global growth. Meanwhile, China is stimulating its economy and the US remains solid. 

A bear market could start some time in the next year if higher US interest rates start to bite and we are very much aware of the short term risks. But with sentiment so depressed and stock market seasonality turning positive (chart 2) we think it’s time to say the glass is half full, not half empty.

Chart 1: RLAM Investor Sentiment Indicator and Global Stock prices

Source: RLAM, Datastream. The RLAM Investor Sentiment Indicator includes inputs derived from market volatility, private investor bullishness and US company director share buying activity.

Chart 2: The average calendar year profile of Global Stock returns since 1973

Source: RLAM, Datastream

Past performance is no guide to the future. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.