From the desk of Willie Delwiche.
Key Takeaway: It takes bulls to have a bull market. Seeing cyclical sentiment moving from pessimism to neutral in recent weeks has been fuel for the rally off of the June lows. From both a fund flow and survey perspective, investors have been increasing participation since mid-year. But with a robust appetite for Risk On assets still not apparent, the biggest risk from a sentiment perspective is that macro headaches fuel an uptick in pessimism that overwhelms the positive thrust developments of the past few weeks. That could lead to a more complete unwind from a strategic positioning perspective. For now, optimism is on the rise but far from excessive, and that tends to be a sweet spot for stocks.
Sentiment Report Chart of the Week: Households Hold On To Stocks
From a short-term and intermediate-term perspective, volatility in the first half of 2022 fueled fear and pessimism that moved toward historical extremes. From a longer-term perspective, the unwind in optimism looks far from complete. Valuations remain historically elevated and while household exposure to stocks has fallen from 71% to 64% this year, its still above its long-term average of 62%. When sentiment has reached washed out levels in the past, equity exposure has tended to be below 55%. Households were reluctant to get rid of equity exposure on the way down, the question now is whether they will re-evaluate their risk tolerances now that stocks are off their lows.
