Why Investor Sentiment Is Still Bullish in the Face of Lackluster Economic News

By Monday, July 15, 2013

Economic NewsThe equity market continues to trade while hanging on the Federal Reserve’s every word. There continues to be buoyancy in investor sentiment, and it’s flying in the face of what can only be described as modest earnings results so far. And the fervor that institutional investors have to be buyers in this market remains unabated, thanks to the Fed’s policies.

There’s been a positive take on economic news lately, even if the data is below consensus. There has also been some decent news from individual companies that can be thought of as Main-Street gauges on the U.S. economy.

Costco Wholesale Corporation (COST) reported a solid eight-percent gain in total sales—six percent on a comparable sales basis—for the five weeks ended July 7, including fuel and foreign exchange.

Investor sentiment is strong enough among large investors to continue buying in this equity market, so long as there is stability from the Federal Reserve and earnings results meet consensus.

It is a peculiar environment not to have had a meaningful retrenchment in the equity market. While the Street (and I) totally expected a healthy correction in share prices after the January breakout, it didn’t happen.

The market did have a small pullback on wavering investor sentiment, but I think the equity market overreacted and misinterpreted the Federal Reserve’s statement regarding quantitative easing. Recent minutes from the central bank meeting made note of this.

Investor sentiment among individual investors still seems very reluctant. There have been new cash inflows dedicated to stocks, but a lot of investors are wary of buying in an equity market that is trading right around its all-time high.

Of course, that is how the stock market has performed historically: long periods of consolidation are met with a breakout and subsequent bull market in anticipation of economic acceleration.

The equity market continues to be very much a leading system of speculation regarding earnings and general economic growth.

Investor sentiment is very different than investment risk, and it is worthwhile separating those two factors in terms of shaping your market view.

In an environment of extreme monetary assistance to capital markets, investor sentiment is emboldened. The result is a substantially rising stock market in the face of only modest revenue and earnings growth.

With the certainty from the Federal Reserve regarding continued quantitative easing, it is very possible that the equity market could keep right on ticking higher until the end of the year for a major double-digit gain.

Investor sentiment among institutional investors is so influenced by monetary policy, that we even have days when the equity market goes up substantially on bad economic news. The idea is that bad data increases the likelihood of continued quantitative easing and artificially low interest rates, which boosts investor sentiment. It really is an outrageous set of circumstances. (See “The Few Sectors That Will Continue to Gain in This Unpredictable Market.”)


About the Author | Browse Mitchell Clark's Articles

Mitchell Clark is a senior editor at Lombardi Financial, specializing in large- and micro-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, including Micro-Cap Reporter, Income for Life, Biotech Breakthrough Stock Report, and 100% Letter. Mitchell has been with Lombardi Financial for 17 years. He won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was a stockbroker for a large investment bank. In the... Read Full Bio »

Sep. 4, 2015
Trailing 12-month EPS for Dow Jones companies (Most Recent Quarter) $1014.15
Trailing 12-month Price/earnings multiple (Most Recent Quarter)

17.44

Dow Jones Industrial Average Dividend Yield 2.62%
10-year U.S. Treasury Yield 2.19%

Immediate term outlook:
The bear market rally in stocks that started in March 2009, extended because of unprecedented central bank money printing, is coming to an end. Gold bullion is up $1,000 an ounce since we first recommended it in 2002 and we are still bullish on the physical metal.

Short-to-medium term outlook:
World economies are entering their slowest growth period since 2009. The Chinese economy grew last year at its slowest pace in 24 years. Japan is in recession. The eurozone is in depression. With almost half the S&P 500 companies deriving revenue outside the U.S., slower world economic growth will negatively impact revenue and earnings growth of American companies. Domestically, America’s gross domestic product grew by only a meager 2.3% in the second quarter, which will negatively impact an already overpriced equity market.

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