To The Moon

Over the past two weeks, investor sentiment declined in all markets we follow except Australia and China. Despite this souring sentiment, markets continued to rise everywhere, defying policy chaos and rising unpredictability. US investors turned bearish, dragging the Global Developed Market down with them. Investors in Asia ex-Japan, Australia, Global Developed ex-US markets, Global Emerging Markets, Europe, Japan, and the UK remained neutral, unwilling to commit to either a positive or negative view for the time being – much less a bullish or bearish view.

Last week’s immigration battle was characterized by a series of punches and, surprisingly, counterpunches, as leaders responded on X to the Trump administration’s latest moves on immigration and tariff policies - both vital for the US inflation outlook – with outraged demands for satisfaction, as if calling for pistols at dawn. But markets shrugged them off, tariffs be damned, and continued to rise, ignoring even the veiled threats to the Fed’s independence made by President Trump during his speech at Davos.

Still, sentiment among US investors continued to decline over the last two weeks, turning bearish and suggesting they sense a brewing storm in the market, one that could escalate to a category five at any moment. The center has been replaced by the fringe, and there’s a new sheriff in town—one with an outsized desire to be desired by his base, who knows what he wants, and pity the fool who thinks they can change his mind. Anyone not adapting to this revolt and the rapid-fire response it demands will be as baffled as Elvis was when the Beatles stormed America.

Investors do not like to think they are being less than rational, and at the mercy of their emotions. However, in their hearts they know that at times, they are like those people who are taken for walks by their dogs - towed through hedges and dragged into ditches by an undisciplined and instinctive energy. During those times, small changes in context can have a big impact on understanding. In an environment dominated by policy uncertainty, transactional dynamics, Twitter diplomacy, and hourly news cycles, forecasting has become a live show. You only get one chance to adjust your understanding. Blink and you missed it. In a Trump world, success isn’t free. You have to pay attention.

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

• US: FOMC meeting (exp. Unch.), PCE and Q4 GDP data. Earnings from tech mega caps Microsoft, Meta, Tesla, and Apple, as well as Visa, Mastercard, and Starbucks.

• Europe: ECB rate setting meeting (exp. -25 bps). Preliminary inflation readings and GDP growth rate for the Eurozone, Germany, France, and Spain.

• APAC: China PMI data and BoC interest rate decision (exp. -25 bps). Australia CPI data. Japan’s industrial production, retail sales, unemployment rate, consumer confidence, and Tokyo CPI data.

• Global: Any new policy announcements, pronouncements, denouncements, renouncement, by the Trump administration around tariffs, immigration, Gaza, Ukraine, China, NATO, the EU, or who actually killed JFK.

[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 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.