What an end to the week.
Stronger jobs report. Rates up. Equities down. Tech down a lot. And, to finish it off, oil prices also jumped higher.
Here’s my take from a sentiment perspective.
Firstly, from a broad equity perspective, stronger growth and higher yields are not automatically a bad scenario.
The relationship between bond yields and equities changes over time for many reasons. But the most important point is that yields and equities are both reacting to the macro environment. The driver of higher yields matters.
If yields are rising because growth is stronger, equities can cope with that. Less deflation risk is also good. Hyperinflation risk, obviously, is not.
Secondly, stronger growth and higher yields are a scenario for rotation within equities.
Over the past few weeks, I have been writing about the extreme shift in investor sentiment into secular growth — Tech, AI and the broader AI ecosystem — and out of cyclical growth, including Industrials, European equities and US Value.
The main catalyst for a rotation in the other direction, as we saw last autumn, would be evidence that the global economy is not slowing materially, that the cycle can extend, and that downside growth risks are contained.
Last week’s market pattern was consistent with that.
We had stronger growth data in the form of non-farm payrolls. And the biggest underperformers were in the secular growth / AI ecosystem, while European equities, Industrials and US Value were among the best performers.
From a sentiment perspective, that rotation could run further before hitting a sentiment headwind — provided the macro data stays supportive.
Overall, both of our Risk-On / Risk-Off aggregates declined alongside lower risky asset prices. That includes the higher-frequency version, based only on daily and weekly inputs, and the broader version, which also includes slower-moving monthly indicators.
The higher-frequency aggregate fell to the 45th percentile. That takes it back into slightly net bearish territory and to its lowest level since the Iran-war-related rally in April.
That is still far from the historical buy threshold. But it does show that overall investor sentiment is not bullish, even if some pockets — especially Tech — remain ripe with optimism.
Bottom line: Sentiment is back to slightly net bearish.
That is good news from a risky asset perspective, but not bearish enough to be a strong signal on its own. A buy case would need more pillars than sentiment alone.
Top 3 This Week
- Sentiment: back to slightly bearish
The overall sentiment setup is supportive for risky assets, but not bearish enough to drive a buy case on its own.
- Room for Rotation
A market setup of stronger growth and rising yields would be manageable for equities, but could drive sharp rotation within equities. Extremely unpopular cyclical growth areas — including European equities, Industrials and US Value — could benefit.
- Brazil
Brazilian equities have gone from loved to left behind in a very short period of time and look increasingly interesting from a sentiment perspective.
Sentiment Overview
- The extreme gap between investor surveys has narrowed. Both outliers regressed towards the mean. Overall, the survey picture is still consistent with neutral investor sentiment and broadly in line with the wider sentiment setup.
- AAII Bull-Bear remained in net bearish territory, but only marginally. Bulls and Bears are almost balanced, which is a 34th percentile outcome.
- Investors Intelligence Bull-Bear sits in the middle, at the 52nd percentile, and has been pretty stable for more than a month.
- NAAIM Exposure has come off the previous week’s high. It has fallen from the 95th percentile to the 79th percentile. Still the most bullish of the surveys, but much less so than a week ago.
- The usual caveat on NAAIM still applies. Historically, it has not reliably sent sell signals after extreme bullishness. Its better track record has been on buy signals after bearishness.
- ETF issuance is still strong, but the growth rate has moderated. This is far from a bearish sign. But after reaching an 18-year high of 28% earlier this year, growth in ETF launches has slowed to 25%. Still impressive, but a noteworthy change.