Gauging sentiment is crucial, and there are hard and easy ways to do it

GLOBAL stocks’ returns of 9.5 per cent to Apr 29 alongside a 2.8 per cent rise in the Straits Times Index (STI) align with what I had envisioned in my February column – a strong 2024 for global stocks, with the STI’s banks driving late-year gains. Now, more gains await.

One way to know? Sentiment.

Gauging expectations is crucial as stocks move most on the gap between expectations and subsequent reality. There are hard and easy ways to gauge sentiment; both now reveal more bulls in the market ahead.

Legendary investor John Templeton famously said: “Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.” He perfectly encapsulated sentiment’s cyclical evolution.

For example, after 2020’s rocket-ship recovery from lockdown lows – itself born in despair – sentiment warmed unusually fast in 2021. Frothy pockets emerged in crypto and initial public offerings (IPOs) of special purpose acquisition companies (Spacs), which were then newly permissioned in Singapore.

The lofty sentiment made stocks susceptible to negative surprises. Stocks plunged on the Russia-Ukraine war, inflation, global interest rate hikes and “tightening” by the Monetary Authority of Singapore, as well as supply chain chaos.

Yet, by mid-2022, long-running fears drove irrational pessimism, fostering positive surprise and this bull market’s birth.

Sentiment has since warmed somewhat.

Bank of America’s April fund-manager survey revealed a real rise in global economic expectations. Other surveys showed rising Singaporean consumer confidence, with 79 per cent of residents optimistic about the economy. US and global confidence surveys broadly show brighter outlooks, but scepticism remains – especially in Europe.

Yet, bears wrongly and bizarrely believe we fast-forwarded to euphoria. They point to stale fears such as the Middle East war and Chinese weakness as evidence that investors are too cheery and setting up stocks to fall – while claiming that only a handful of stocks underpin this bull market. This is wrong: nearly 37 per cent of global stocks lead the world’s 9.5 per cent year-to-date return.

So, how can you assess sentiment? Start with one tough method my firm uses: plotting professional sentiment “bell curves”. The aggregate reflects which outcomes are widely expected and discussed – and which aren’t.

This doesn’t foretell what will happen – stocks pre-price common forecasts and then do something different. But it shows what people think will happen and, hence, what markets are pricing – a sentiment signal.

Consider forecasts for America’s widely watched S&P 500 versus actual returns in recent years.

As 2018 began, the median forecast envisaged 5.3 per cent gains in US dollars excluding dividends. The reality? Stocks fell 6.2 per cent. In 2019, the median forecast was 15.8 per cent gains; about half the 28.9 per cent stocks delivered that year. The projection for 2023? A middling 9.4 per cent – way below stocks’ 24.2 per cent surge.

The January 2024 median forecast was 1.8 per cent – nowhere near US stocks’ long-term 10 per cent annualised average return without dividends, which includes bear markets. Hardly optimistic!

But don’t stop at median forecasts. Look deeper.

Of 54 professional S&P 500 2024 forecasts, 40 clustered between -2.9 per cent and 9 per cent, while nine envisaged declines worse than -3 per cent. None foresaw returns exceeding 17.1 per cent.

Euphoria? No. The relative void above 10 per cent suggests that Templeton’s culminating cycle awaits.

An easier sentiment-tracking tool: watch how economic data compare to prior estimates. Consensus forecasts for gross domestic product (GDP), inflation, employment and more are available on many financial and economic news websites.

Are most results undershooting estimates? If so, sentiment is too optimistic. Are they beating estimates? Then sentiment may be too dour. Low expectations mean that even so-so results don’t doom stocks.

Yes, preliminary first-quarter GDP growth for Singapore fell short of analysts’ expectations, with headlines bemoaning the 0.1 per cent quarter-on-quarter growth as paltry. Yet, pundits dourly dismissing healthy growth reveals that scepticism is alive and well.

Moreover, most key recent data are trending above estimates globally – which is bullish.

Consider IPOs, too. I have long said that IPO actually means “It’s probably overpriced”, given that companies do IPOs when prices are best for sellers – founders and early investors – and not buyers.

Heavy issuance usually follows a big rise, when recent returns boost spirits – elevating demand and allowing top dollar pricing. A cycle’s first IPO successes often fan optimism further, leading to later low-quality listings flooding markets. Sunny sentiment detaches from weakening fundamentals.

After 2023’s global IPO swoon, US and European issuance is up, and analysts expect more ahead. But global issuance remains muted. You are seeing this at first hand, with the Singapore Exchange featuring just one lacklustre IPO – Singapore Institute of Advanced Medicine Holdings – this year.

Plus, most of these early-cycle IPOs are established, quality firms. Many use the proceeds to retire costlier debt. New Spacs? There were zero in Singapore in 2023. Nothing euphoric there. Case closed.

Whether using easy or hard methods, tracking sentiment is key. Today, it signals more gains ahead.

The writer is the founder, executive chairman and co-chief investment officer of Fisher Investments, an independent investment adviser serving both individual and institutional investors globally