From the desk of Willie Delwiche.
Key takeaway: Sentiment continues to shift from optimism to pessimism. Unlike the March optimism unwind, the current situation is associated with a waning risk appetite on the part of investors and a more challenging liquidity environment. This argues for patience from a tactical perspective and warns against a premature conclusion that the speculative excesses have been removed from the system. While the pullbacks in some of the speculative areas may seem substantial, they still pale in comparison to the run-ups that were seen in late 2020 and early 2021. In such an environment, less may be more. Surviving such unwinds is not only about preserving capital, but also maintaining mental health.
Sentiment Report Chart of the Week: Risk Appetite Wanes
High-yield corporate bonds are beginning to roll over relative to their safer alternative. This indication of cooling risk appetite is one of the key differences between the sentiment reset last March and the current unwind. Without risk-seeking behavior supporting the shift in sentiment, we could experience a far more meaningful unwind than we did a couple of months ago.
