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Sentiment Gauges Explained

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The first market correction in two years has pretty much come and gone, though volatility remains elevated. In this week’s stock market report, I’d like to talk about sentiment gauges and why they seem to be holding up so well lately.

There are many different types of sentiment indicators, some of which measure investor or business leaders’ actions and what they actually do, others which measure what investors or business leaders feel. And while the two don’t always perfectly align, one thing that’s been pretty consistent lately is how well they’ve held up. But what makes business leaders worry is uncertainty about the future, and that uncertainty can come from changes in healthcare, changes in tax policy, deterioration in economic data, concerns about the labor market … but none of that has really changed all that much, despite the February market correction. Healthcare reform, for the most part, is off the table. Most companies are going to benefit from the tax reform that was passed at the end of last year. Economic data in general has held up quite well. Corporate earnings, which have already been strong, are expected to get even stronger. So, with money to spend and very little economic deterioration, it’s no surprise that the recent business leader sentiment gauge is very near a 45-year high.

Now on to investor sentiment. If you study investor sentiment over the long term, you’ll find that there are two things that tend to impact it the most: price of gasoline and the stock market. Basically, if gasoline prices are up, or the stock market is down, or both, these gauges can take a pretty sharp hit. But that didn’t happen this time. Gasoline prices have been on the rise since December, and then in February we had a stock market correction, and yet investor sentiment gauges barely took a blip, and I think the explanation is the economy. Most investors are going to see a bump in their paycheck because of the tax reform legislation. Housing prices are very near an 18-year high, while unemployment rates are very near an 18-year low. And while there’s very little doubt that this economic expansion is probably closer to the end than the beginning, there’s also very little evidence that that end is coming any time soon.

With such a strong economy, it’s not too surprising that investors are finally doing what we’ve been telling them to do for a long time, and that is invest for the long term, and that is a good thing. You can read more of our thoughts on the economy in the Insights and Ideas section on Schwab.com, and don’t forget, you can follow me on Twitter @RandyAFrederick.

We’ll be back again. Until next time, invest wisely, own your tomorrow.

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