Key Points
  • Along with new records being set by stocks, investor sentiment measures are showing widespread optimism; yet households’ exposure to equities is not at an extreme. We believe the bull market will continue, and suggest investors remain at their target allocations, but worry a bit about complacency.

  • Third quarter earnings season has been solid so far and economic growth has picked up. But the pick of the next Fed chair could cause an uptick in volatility.

  • Globally earnings have been strong as well and are helping to support stocks, but geopolitical and trade issues could cause some consternation.

There’s nothing to fear but…

The ongoing uptrend in stocks has only recently seemed to capture the hearts and minds of investors. The recent lack of volatility and “Teflon” nature of the stock market has boosted investor optimism; but may have also bred complacency about ongoing risks. We expect more upticks in volatility.

Lack of fear causing fear?

VIX YTD

Source: FactSet, Chicago Board Options Exchange. As of Oct. 24, 2017.

But stocks continue to surge

sp500 ytd

Source: FactSet, Standard & Poor's. As of Oct. 24, 2017. Past performance is no guarantee of future results.

As noted, most measures of investor sentiment have moved firmly into optimistic territory; with the Investors Intelligence survey showing a high in newsletter writer optimism not seen since 1987. But behavioral measures of sentiment don’t yet match that optimism: flows into domestic equity mutual funds and exchange-traded funds (ETFs) continue to be flat-to-negative on a cumulative basis. As we’ve been highlighting, it’s easy to argue that we are in the latter innings of the market cycle; even though past performance does not indicate future results that phase often ushers in strong performance.