Investment Clock insights

One of the most depressed sentiment readings in thirty years: time to buy?


Trevor Greetham

30 October 2018

Volatility tends to peak in October, a fact underlined by famous October crashes in 1929, 1987 and 2008. We expected this October to be choppy with the Investment Clock in the equity-unfriendly Stagflation stage of the business cycle and geopolitical risk rising. Trade tensions, Eurozone stress and Brexit uncertainty make for a toxic mix and we reduced equity exposure to neutral in the summer. 
Stock prices have fallen sharply over the month and our proprietary investor sentiment indicator is now almost three standard deviations oversold (see chart). 
Investor sentiment and global equity prices

Things are bad, but they aren't that bad.

Volatility tends to peak in October, a fact underlined by famous October crashes in 1929, 1987 and 2008. We expected this October to be choppy with the Investment Clock in the equity-unfriendly Stagflation stage of the business cycle and geopolitical risk rising. Trade tensions, eurozone stress and Brexit uncertainty make for a toxic mix and as a result we reduced equity exposure to neutral in the summer. 

Stock prices have fallen sharply over the month and our proprietary investor sentiment indicator is now almost three standard deviations oversold (see chart). 

Investor sentiment and global equity prices

Source: Thomson Reuters Datastream as at 26/102018

The indicator includes measures of stock market volatility, a survey of private investor bullishness and a metric showing the degree to which company directors are buying shares in their own companies. Markets are volatile, investors are bearish and US company directors are very strong buyers of their own stock.

To put the current reading into context, this is the tenth most depressed sentiment reading in the 1,450 weeks since 1991 (see table). The Trump Slump is right up there with some of the most memorable panics in living memory.

 

 

 

 

 

 

 

Source: RLAM; ten most extreme negative readings from the RLAM investor sentiment indicator. Weekly data from 25 January 1991 to 26 October 2018.

Things are bad but they aren’t that bad. Global growth has been slowing but we expect US growth to remain strong well into 2019 on the back of Trump’s tax cuts and spending increases. Meanwhile, China is responding to market stress by cutting interest rates, expanding bank credit and cutting taxes. We expect the world economy to continue expanding and we expect stocks to recover from their current negativity as good corporate earnings numbers continue. 

We have been buying stocks on weakness over the last few weeks and now have a moderate overweight position in the multi asset funds we manage. We are very much aware of the short term risks but with sentiment so depressed and stock market seasonality about to turn positive it’s time to say the glass is half full, not half empty.

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.