Key Points

  • Investor sentiment is both wildly/speculatively bullish and more skeptical; it just depends on who you’re tracking.
  • Shorter-term traders (likely skewing younger) are buying equity call options and VIX put options; while longer-term investors are skittish and selling equity funds.
  • The net is that sentiment is currently a mixed bag.

Perhaps the most descriptive statement ever made about the stock market came from the late-great Sir John Templeton (whom I had the great pleasure of meeting on the set of Wall $treet Week With Louis Rukeyser): “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” Notice there is not a single reference to economic statistics, earnings growth, interest rates or valuations. The truth in the statement lies in those omissions, in that emotions and behavior are what actually drive markets—even if trends in the economy and earnings help shape those emotions. In fact, as I’ve often noted, investors think of valuation as a “fundamental” indicator in the sense that most valuation metrics—including P/E ratios—have quantifiable components. The reality is that valuation is more of a sentiment indicator than it is a fundamental indicator.

In addition to understanding investor sentiment as a market cycle driver, it’s important to understand the relationship (and differences) between attitudinal and behavioral measures of sentiment. There are many unique characteristics of the most recent market cycle—not least being the speed with which the COVID crisis took stocks from an all-time high on February 19 to a -34% bear market decline by March 23, and back to all-time highs by September 2. Another unique characteristic is the, at times, vast spread between behavioral and attitudinal measures of sentiment.