Key Points

  • There is no shortage of things to worry about, but the market’s Teflon coating has prevented anything from sticking.

  • Attitudinal sentiment measures are mixed, but behavioral measures show elevated optimism.

  • Partisan conflict is an interesting and contrarian measure of “sentiment.”

The war of words between President Trump and North Korea’s Kim Jong Un has heated up; culture wars are raging; healthcare reform looks unlikely (again); Harvey, Irma, Jose and Maria have been uninvited and unwelcome visitors; there remains toxic partisan conflict in DC; and the Fed has taken a giant step toward monetary policy normalization.

The stock market’s reaction: What, me worry? There’s no shortage of things about which to worry, but the stock market’s Teflon coating has so far prevented any of the aforementioned uncertainties from sticking. Specific to the hurricanes, the S&P 500 has performed significantly better in the three weeks since Harvey hit than it did following Hurricanes Katrina and Sandy.
It’s time again for an update on investor sentiment, and the latest update of surveys and indices takes into consideration the stock market’s new highs; albeit highs which have come via small percentage gains and tight trading ranges. It should not come as a surprise that sentiment has become more optimistic; but the nuances are important.

Attitudes

Let’s start with the Crowd Sentiment Poll (CSP) from Ned Davis Research, which is an amalgamation of a number of individual sentiment indices. As you can see in the chart below, sentiment has rebounded further into “extreme optimism” territory; a zone in which stocks have experienced their lowest returns historically (see table).

Source: Ned Davis Research (NDR), Inc. (Further distribution prohibited without prior permission. Copyright 2017 © Ned Davis Research, Inc. All rights reserved.), as of September 19, 2017.