Axioma ROOF™ Score Highlights: Week of February 24, 2025

Insights from last week's changes in investor sentiment:

Investor sentiment continued to weaken last week, with most markets ending either neutral or negative. In China, the mood shifted from bullish in prior weeks to just positive, despite billions in market-supporting measures from authorities and a 20% market gain since January 13. Globally, investors and US government employees are bracing for the impact of the Trump administration’s shock therapy, uncertain of its effectiveness and not expecting it to be as painless as promised. Much like during an earthquake, the best approach is to take cover, stay still, and wait for the shaking to stop before assessing the damage.

As of now, the Trump administration’s policymaking feels like a magic 8 ball. The problem is that as long as the ball is being shaken, questions remain unanswered. Only when it is still do the answers appear. We’re 30 days into Trump’s second term, and he hasn’t stopped vigorously shaking the 8 ball yet. Investors won’t know the outcome of any policy decisions until he lets it rest for a while. This constant shaking has created a vacuum of predictability for them, resulting in significant uncertainty. They are left searching for traces of predictability in every shake of the 8 ball, each time thinking they heard it wafting above the din in one of Trump’s interviews with Fox News.

Investors need clarity and stability to securely steer their small world (portfolios) safely through the larger one (markets). Clarity and research are the hallmarks of a disciplined investment process: the excavation of signals from time series, secret knowledge, and conspiratorial theories, constantly building new forecasts around corporate has-beens or never-weres. Forecasting the outcome of policies made without a rule book and a lack of transparency feels like racing towards an ever-shifting finish line. Even with clarity, future returns are always changing, and investors’ forecasts are never perfect. But today, these forecasts are forced to rely on a set of assumptions about the inputs that investors must provide to generate outputs from their models, which feel increasingly more like abstractions or phantom limbs than beacons or reliable signals.

Investors have an ethnographer’s curiosity about readouts of their leader’s meetings with each other, sifting through those dispatches from the front line in search of patterns that would bring the wider world into focus. According to Trump’s blunt typology of the world, there are leaders who are “great” and then leaders who aren’t. This latter category is multitudinous and now includes most allies. More shockingly, the former category now includes Putin, Xi, and Kim Jong Un! That’s enough to make investors feel discomfort about the new world order at a molecular level.

This new administration defines itself by what it rejects – DEI, climate change, vaccines, science – adopting a kitchen sink approach to negation, resulting in blunt cuts to the federal government and its institutions, the blasting of old alliances and the forging of new ones, and direct intervention in other countries’ election processes. Investors are only told what and who the administration opposes, leaving them to imagine what world stands on the other side. Every day, Trump rails against what he considers to be a misfiled book without explaining where it truly belongs. Navigating through this noise is like trying to find a phone number in a phone book that hasn’t been alphabetized – yes, it’s in there somewhere, but finding it will have more to do with luck than skill.

The latest consumer surveys about the economy and inflation expectations among consumers hint that the administration may be underestimating the impact of its drastic cuts and trade policies on its popularity. Open questions for both consumers and investors include: Where will Trump and his Derridian deconstruction approach to governing lead America? How will Americans continue to dream together if they cannot agree on any common values? The only evidence so far from the corporate world (Musk, Zuckerberg, Google Map, Bernard Arnault, etc.) suggests a strong desire to be folded into Trump’s world. Meanwhile, the idea for “reciprocal tariffs” sounds like it was borrowed from grade school, where kids split every purchase of chewing gum five ways, shaking one another down at recess for any debt greater than seventy-five cents left unpaid for more than a week.

The numbers don’t add up yet, but the 8 ball is still being shaken. Investors will need to wait until the shaking stops to see the results. For now, a neutral sentiment simply reflects the uncertainty they feel.

Potential triggers for sentiment-driven market moves this week[1]

• US: Personal income and spending, PCE, durable goods orders, housing market data, and any revisions to Q4 GDP growth. Speeches by several Federal Reserve officials and consumer confidence.

• Europe: Results of Germany’s general election. ECB January policy meeting minutes.

• APAC: Japan retail sales, industrial production, and housing starts for January, and Tokyo inflation for February.

• Global: The US at war with itself and the rest of the world.

[1] If sentiment is bearish/bullish, a negative/positive surprise on these data releases could trigger an overreaction.

Note: green background = bullish, red background = bearish

Changes to investor sentiment over the past 180 days for the markets we follow:

How to Interpret These Charts:

Top Charts:

The top charts illustrate the ROOF ratio, which represents investor sentiment. This ratio is depicted in green on the left axis, while the cumulative returns of the underlying market are shown in black on the right axis. Key reference lines include:

• A horizontal red line at -0.5 (left axis), marking the threshold between negative sentiment (-0.2 to -0.5) and bearish sentiment (< -0.5).

• A horizontal blue line at +0.5 (left axis), indicating the boundary between positive sentiment (+0.2 to +0.5) and bullish sentiment (> +0.5).

• A horizontal grey line at 0.0 (left axis), around which sentiment is considered neutral (-0.2 to +0.2).

Bottom Charts:

The bottom charts display the levels of risk tolerance (green line) and risk aversion (red line) within the market, representing investors' demand and supply for risk, respectively. Key insights include:

• When risk tolerance (green line) exceeds risk aversion (red line), more investors are willing to buy risk assets than there are investors willing to sell them at the current price. This scenario forces risk-tolerant investors to offer a premium to entice more risk-averse investors to trade, thereby driving markets upward.

• Conversely, when risk aversion (red line) surpasses risk tolerance (green line), the market dynamics reverse.

The net balance between risk tolerance and risk aversion levels is used to compute the ROOF ratio shown in the top charts, reflecting the sentiment of the average investor in the market.

Blue Shaded Zone:

The blue shaded zone between levels 3 and 4 for both indicators signifies a reasonable balance between the supply and demand for risk in the market. When both lines remain within this blue zone, the market is considered ‘emotionally’ stable. However, when both lines move outside this zone, the significant imbalance in demand and supply for risk can lead to overreactions to unexpected news or risk events.