To The Moon

Insights from last week's changes in investor sentiment:

Over the past two weeks, investor sentiment sank, turning bearish in six out of the ten markets we monitor – the highest number since early August 2024. Sentiment also turned negative in Japan and Australia, while UK investors remained neutral, albeit with a negative bias. Only Chinese investors stayed positive, ending the week bullish on hopes for further stimulus from the authorities and the CCP's renewed interest in the small-cap private tech sector (excluding small caps, sentiment is neutral). The supply and demand balance for risk is now very negative in seven markets, creating conditions ripe for an emotional overreaction to any unforeseen denial of investors’ expectations this week.

Fundamentally not much has changed: inflation has resumed its decline after a brief pause, interest rates are still expected to be cut further this year in both the US and Europe, the economy and the job market remain resilient, and according to Factset this quarter marks the lowest number of S&P 500 companies citing “recession” on earnings calls for a quarter since Q1 2018. But emotionally, everything has changed: consumer confidence plummeted, inflation expectations have surged, small business uncertainty has risen, and the Atlanta Fed’s GDPNow model is sounding the alarm. So, while fundamental data suggests everything is still on track, investors just don’t believe it.

Instead investors admitted to themselves that they weren’t exactly riveted by the high uncertainty caused by the “je ne sais fou” of the Trump administration, and that life was too short and that if they wanted to sell, they should just sell and not feel guilty or apologize, or try to justify it or anything. So, last week, feeling very guilty and apologizing and trying to justify it, they sold.

US equities have now had the worst performance in a president’s first 50 days since Barack Obama took office in the midst of the global financial crisis. Additionally, Trump’s approval ratings have taken a hit across the board, bringing his honeymoon to an abrupt end faster than any other president’s save one: Trump 1.0. Proof that history often repeats itself with very little concern about whether we learned anything from it or not.

As for Trump’s ongoing trade wars, some leaders have attempted to follow the old adage “if you can’t beat them, join them.” However, they’ve discovered that in Trump’s world, most of the time you can’t beat him, and the rest of the time he won’t let you join him anyway, so where does that leave them? For the economy, tariffs are like drinking poison and waiting for the other person to die.

For markets, uncertainty is bad. Predictability is good. That’s because most investors suffer from 'reasonism' - the need to believe there is a reason for everything. As a group, 'reasonists' can be a volatile bunch when their need for clarity isn’t met or their expectations are denied. Their problem now is that President Trump is more of a general reasonist, who doesn’t like to get too specific about the reasons (or consequences) for his actions, while trying to convince investors above all that there is one.

"We're going to do something very special, something that nobody's ever seen before."

"Big changes are coming, and they're going to be tremendous, believe me."

"We're looking at a lot of things, and some of them are going to be very, very good."

"There's a lot happening, and it's all going to be great, you'll see."

"We're going to fix it, whatever it is, and it's going to be amazing."

In short, for investors, the lagging indicators may appear positive, but the leading ones (pun) paint a disturbing picture. However, as with any good tragedy (or comedy - the jury is still out on this administration), things only start to improve for the protagonists in the middle of Act 3, and we’re not even halfway through Act 1. Investing when uncertainty is high is madness, of course, but it’s a madness that is now being measured.

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

• US: Fed interest rate decision and dot plot. Retail sales, industrial production, and housing market indicators.

• Europe: BoE interest rate decision and UK unemployment data. German economic sentiment and Eurozone consumer confidence data.

• APAC: BoJ and BoC interest rate decisions. China’s industrial production, retail sales, and fixed asset investment data. Japan’s trade balance, inflation, and machinery orders data.

• Global: Peace negotiations in Ukraine and Gaza. Trade negotiations with Canada, the EU, and China – call, raise, or fold?

[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.