Thursday, December 21, 2017

Is Optimism Too High?

One of my more regular topics that I write about on the blog from time to time is an update on sentiment measures, both individual and business. Sentiment might be viewed as the third leg of a stool, with the other two being the economy and business financial health or earnings growth. Without positive sentiment from businesses and investors, the economy is more likely to see lackluster growth. What got me to thinking about whether optimism is too high or not was a recent post by Josh Brown whose blog is titled The Reformed Broker.

In terms of topics for the blog, I have taken the stance that discussing politics on our blog is of limited use. However, this one time, because of Josh's post, I am going to tread lightly into the political discourse by highlighting a couple excerpts from Josh's article. He noted in his post, Trump’s Singular Accomplishment, how sentiment seems to have turned decidedly more optimistic (he uses the phrase "the ignition of Animal Spirits") and this has the potential to lead to a favorable environment in 2018. Some highlights from Josh's article and he does note he is not a fan of the President's:
  • "Donald Trump’s singular accomplishment, in my view, is the ignition of Animal Spirits in the stock market and the real economy. Small business confidence measures shot up from the week of his inauguration and have remained elevated ever since. PE multiples expanded throughout the course of the year, which was not solely due to his tax policy – it was also about his swagger..."
  • "The recent run in the stock market that began post-Thanksgiving should absolutely be attributed to the tax bill, which many observers had assumed would be pushed into the first quarter of the year. When the momentum became apparent, the S&P 500 began to price it in quickly, adding another leg of gains to an already strong year of returns."
  • "I think there’s a chance that this coming year is the moment at which investors, CEOs, captains of industry, large funds and other allocators and spenders of capital drop all pretense of being scarred by the last crisis and get busy sowing the seeds of the next one. Maybe we’ll call it the IDGAF phase. Where anything goes and everyone lets it all hang out."
  • I don’t know for sure, but anyone that says “Impossible” isn’t terribly well-versed in the history of markets. We’ve seen a succession these last two hundred years of one impossible thing after another being toppled and then surpassed in rapid succession, just when everyone said no chance.
  • Yes chance.
  • Obama in a million years could never have accomplished this. He was a re-regulator, not a de-regulator, which matched up precisely with what the country’s mood demanded at the time of his inauguration in 2008. Hillary’s tax cut, if ever such a thing had been proposed, would never have approached the brazen nature of this one, despite how Corporatist she was always accused of having been.
So in Josh's words, the Animal Spirits may have been ignited. In my view this is showing up in the various sentiment measures too. I list several recent charts highlighting strong sentiment levels.

Surge in Small Business Optimism:

Strong Consumer Sentiment

Individual Investor Sentiment:

Individual Investor Bull/Bear Spread

Institutional Investor Sentiment

A risk for the market is the fact sentiment can get too good and create bubbles or over optimism. We do not believe the market or investors are at this stage yet. The lack of any significant market pullback since February of 2016 is also a potential risk, only due to the fact the average market correction in any given year is 14%.  In terms of the Sentiment Cycle, this over optimistic phase would look like the 'enthusiasm phase' as noted in a post last month. In my view one key to extending the economic and market cycle will be continued synchronized global growth along with companies sharing the benefit of the tax cut with its employees as consumer account for 70% of economic growth. It is certainly looking like another leg higher for the economy and market may be unfolding.

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