It may seem like a silly question with Covid cases spiking to new highs around the world, but I’m getting concerned that investors may be becoming a bit too complacent, cautions John Boyd, mutual fund expert and editor at Fidelity Monitor & Insight.
Surveys of both individual and institutional investors show very high optimism. In a recent weekly AAII survey of individual investors, bullishness hit 55% (versus the long-term average of 37.9%), the highest reading in nearly three years.
Evercore ISI surveys 303 large institutional investors weekly, and currently, over 62% believe the next 10% move in stocks will be up (less than 25% felt that way in late April).
There are other measures of sentiment that don’t rely on surveys of investors, but rather track their actual market behavior.
The CNN Business Fear & Greed Index, which uses seven measures of investor behavior, is now registering “extreme greed.” For example, one of the seven factors is the ratio of put volume (a put gives the buyer the right to sell a stock at a set price) to call volume (the right to buy a stock at a set price).
If put buying is high, investors are expecting stock prices to decline and vice-versa. Recently, volume in put options has lagged volume in call options by 66.50%, among the lowest level of put buying in the last two years.
Stock analysts are becoming more bullish as well. Until recently, they have significantly underestimated corporate earnings.
For example, in June, the estimate for 3rd-quarter S&P 500 earnings per share was $30.89. Today, with 94% of firms reporting, it stands at $37.78 — a 22% increase! For the past few months, however, they’ve been busy bumping up their estimates for the fourth quarter and 2021.
Of course, there are ample reasons for investors to be optimistic now. First and foremost among them is the incredibly positive news on the Covid vaccine front. Health care workers may start getting a vaccine shortly after that.
Investors who have propelled this market higher despite fears of economic devastation, by “looking past the abyss” as I wrote back in May, can now actually “see” the other side.
Moreover, the economy has proven far more resilient than most expected and the vast majority of data on the economy is pointing to further gains ahead. While the idea of a “V-shaped” recovery was widely dismissed early on, the recovery’s path looks a lot like a V-shape now. The one area of weakness is employment.
Sentiment is typically viewed as a contrary indicator. With so much optimism inherent in the market, it is vulnerable to any number of disappointments, say for example, some problem with the vaccine(s).
While we may think we can “see” the end of Covid, we are not there yet and we may have to endure a lot of market gyrations before we do. But get there we will and stocks are still poised to profit.
