Cyclical Stocks Outperforming Defensive Stocks An Indication Of A Strengthening Economy?

Since the beginning of 2018, investors have encountered a stock market that is more volatile, yet at a level of volatility that is more normal. The below chart shows the return pattern for the S&P 500 Index since 1/2/2018 and the steep decline that began at the end of last September has been followed by a sharp recovery in 2019.

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Investor Sentiment Has Improved But Not To An Extreme Level

Several recent releases of various investor sentiment reports show an improvement in overall investor sentiment. In late December I noted a number of the sentiment measures were indicating extreme fear on the part of investors. Since my December post both sentiment and the equity market have experienced a marked improvement. One example is this week's release of the AAII Sentiment Survey. Individual investor bullish sentiment improved 8.1 percentage points week over week to 39.9%. In mid December the bullish sentiment fell to 20.9%. Although the bullish sentiment level of 39.9% is an improved level, it is just above the long term average of 38.5%.

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Higher U.S. Stock Prices Not Driven By Higher Domestic Equity Inflows

The end of 2018 saw the S&P 500 Index return decline over 13% as seen in the first chart below. The second chart shows the snap back in the market that has rewarded investors at the start of 2019 with the price only return of the S&P 500 Index up nearly 9%.

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