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Randy Frederick
Managing Director of Trading and Derivatives at Schwab
Weekly Market Perspectives

Tracking Sentiment: Are Investors Too Optimistic About Stocks?

October 17, 2017


RANDY FREDERICK: There seems to be no end in sight to the bull market in equities, but that doesn’t mean there’s nothing to worry about. Liz Ann Sonders joins me for the October 16th Schwab Market Snapshot, to share her observations on some areas where things might be starting to look just a little bit too frothy.

So, Liz Ann, I know that you’re a career-long observer of investor sentiment, and I’ve heard you say recently—at some of the client events where you’ve spoken—there’s been a little bit of a change in attitude recently. Now, I know it’s only anecdotal, but can you share some of those details with us?

LIZ ANN SONDERS: Yeah, Randy, I would say that it really was quite a remarkable change in the last week or so. It was almost like somebody flipped a switch. I’ve done events both for individual investor side of our business, as well for Advisor Services, advisors that sit on our platform. And it really is a remarkable change in, I think, the mindset and the attitudes of investors. And I tend to judge that by the types of questions that I get during the Q&A sessions.

And much as you and I have talked about on these calls in the past, up until this recent turn, I would say most of the questions that I would get really for the past eight-plus years had a more dour tone to it. It was always some variety of ‘What’s the next shoe to drop?’ ‘What’s the next crisis?’ ‘What’s the next black swan?’ If people asked me to comment on something they read, it was probably a more bearish commentary that they read.

Really, in the last week or so, I’ve seen about 180-degree shift. The questions have a much more optimistic and even sometimes opportunistic tone to them. Asking about things like year-end targets on the S&P, how much more upside could there be. Questions even about things like bitcoin and cryptocurrencies. So I really do think, although anecdotal, our view into the mindset, I think, of individual investors is second to none, simply because we are the largest in the business. And it is anecdotal, but I think very notable.*

RANDY: Well, it sounds like the kind of things you’re talking about are mostly what we call attitudinal measures. Now, I know there are some more quantifiable ways to measure investor sentiment. What are you seeing in that area?

LIZ ANN: Right. So even the quantifiable measures—the many different sentiment indexes that are out there—you could categorize them as some that are attitudinal in nature, and some that are behavioral in nature.

So some of the more popular indexes that track attitudinal measures of sentiment would be one put out by the American Association of Individual Investors that poll their members as to whether they’re bullish or bearish. That shows excess bullishness right now.

Investors Intelligence, which measures the optimism or pessimism of newsletter writers, they are highly optimistic right now. Market Vane, which looks at advisors’ views on both individual stocks and the market overall, also extremely optimistic.

Then on the other side, there’s the behavioral measures. One of the most common behavioral measures would be fund flows. Now, flows into domestic exchange-traded funds continue to be strong, but we’re not seeing that yet met by flows into traditional mutual funds into the U.S. equity market. I’d be a bit more concerned if the behavioral measures started to track in line with the attitudinal measures.

And I know, Randy, you have some interesting thoughts on sentiment, as well.

RANDY: That’s right. And, you know, it seems like lately, some of the economic data that we’ve been getting is just almost too good to be true. And, of course, we’ve been in this unprecedented period of really low volatility for a while. And, frankly, put-call ratios—which is something I track closely every single day—show just a very modest amount of downside hedging.

It kind of strikes me that when we get to that point where almost no one seems to be worried about almost anything—that might be the time where it seems like we might want to get just a little bit more cautious.

RANDY: Listen, if you want to read more from Liz Ann, you can do that in the Insights and Ideas section of Schwab.com. You can follow her on Twitter @LizAnnSonders. And, of course, you can always follow me on Twitter @RandyAFrederick. We’ll be back again. Until next time, invest wisely. Own your tomorrow.

*Schwab Advisor Services™ serves independent investment advisors and includes the custody, trading and support services of Charles Schwab & Co., Inc. [("Schwab")], member SIPC. Schwab Advisor Services is the largest custodian of RIA assets with 1.3 trillion under management as of Q4 2016.



Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

Please note that this content was created as of the specific date indicated and reflects the author’s views as of that date. It will be kept solely for historical purposes, and the author’s opinions may change, without notice, in reaction to shifting economic, market, business, and other conditions.

Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Investing involves risk including loss of principal.

Schwab Advisor Services™ serves independent investment advisors and includes the custody, trading and support services of Charles Schwab & Co., Inc. [("Schwab")], member SIPC. Schwab Advisor Services is the largest custodian of RIA assets with 1.3 trillion under management as of Q4 2016.

©2017 Charles Schwab & Co., Inc. (“Schwab”). All rights reserved. Member SIPC (1017-7FX2).

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DISCLOSURE
This material was prepared by an independent third party that is not affiliated with Schwab. Schwab does not edit or endorse any of this material and is not responsible for its content.

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