The ZEW Index of Economic Sentiment has a poor reputation among many investors — and I think that’s largely undeserved.
The issue is category error.
ZEW’s headline index is often discussed as if it were comparable to ifo expectations or the ISM: a “hard-working” leading indicator for real economic activity. But judged on that yardstick, it’s easy to be disappointed.
Instead, I think ZEW is much more useful when you treat it as what it really is: a monthly survey of financial-market experts — i.e., a sentiment / expectations indicator for markets, narratives, and risk appetite. ZEW itself describes the survey as a monthly panel of analysts asked about six-month expectations for the economy and markets.
In this post, I focus on the sector indicators — one of the most investor-useful parts of the survey.
My score: 1.5 out of 3.
Not all sentiment indicators are created equal, Part 15
Need to know
- What is it: a monthly panel survey of market experts (banks, insurers, large industrials), asking questions on a 6-month outlook.
- The good: long, consistent history and useful contrarian sentiment signals for most equity sectors.
- The bad: monthly frequency can miss market extremes; weak contrarian signals for Health Care and Materials (in our tests).
- Current message:
- Biggest sentiment drop: Tech
- Biggest sentiment increase: Cyclicals
- Most bullish sentiment: Banks, Utilities
- Most bearish sentiment: Health Care, Materials