Mortgage rates are soaring and housing market conditions are deteriorating. Sentiment is sour in both the financial markets and the economy.
The Numbers: Expectations for home selling conditions are at a level that have been seen leading up to, through, and in the wake of the financial crisis. This isn’t an isolated report and its both sides of the market. Data from the University of Michigan shows that the fewest survey respondents since the early 1980’s see this as a good time to buy a house (and that was prior to the most recent spike in mortgage rates).
Young investors were swept away in the 2021 speculative bubble and came into 2022 with lofty expectations.
The Numbers: The University of Michigan Survey of Consumers shows that a record 70% of investors in the 18-34 age group came into 2022 expecting that stocks would rise over the course of the year. For the 35-54 age group it was 61% and for those 55+ it was 59%. As of August, all three groups were below 50%, with expectations among younger investors getting more in line with those who have been through more market cycles.
The Fed unleashed a speculative bubble when it cut rates in the second half of 2019. Apple (AAPL), the largest company in the US, led the market higher during the boom and has been resilient as other areas have gone bust.
The Numbers: Both AAPL and the equal-weight S&P 500 (RSP) are down 20% this year. But while RSP has pulled back to its lowest level since early 2021, Apple is still 14% above its June low. Longer-term, RSP is now only 20% above its mid-2019 level, while AAPL still has a 200% gain over the past 3+ years.
Key Takeaway: With last month’s rally behind us and the June lows quickly approaching, investor attitudes are beginning to sour. Bears on the II survey now outnumber bulls for the first time since mid-July, and the Consensus bulls continue to decline. Despite this pessimism, investors have been slow to take action. They have kept equity exposure elevated and equity ETFs actually saw $20B of inflows last week (after the two preceding weeks saw $11B of outflows). Increased pessimism at this point is the most significant sentiment risk for stocks. Investors (and their portfolios) have been bruised by a perceived lack of alternatives to stocks but with short-term bond yields now at their highest levels that could be changing.
Sentiment Report Chart of the Week: Safe Havens Haven’t Been Safe
Key Takeaway: The bulls have some heavy lifting as bears pack on the pounds. Yes, last week was impressive, as was the summer rally. But questions about sustainability remain. After all, in the wake of the greatest bull market rally in history in 2020/2021, it shouldn’t be surprising to get the most significant bear market rally ever in 2022. That leaves stocks with an uphill battle in the face of persistent macro headwinds (rising interest rates, dwindling growth expectations, and unrelenting US dollar strength). While pessimism has reached levels indicating opportunity and decreased risk for longs, downside risks remain. An increase in selling pressure could excite the bear camp, prompting a more complete unwind in equity exposure and accelerating interest in bonds even if yields continue to move higher.
Sentiment Report Chart of the Week: Bonds Unloved For Long Enough?
Key Takeaway: Despite the stock market’s reluctance toward sustained advances, investors have refused to throw in the towel. The bulls showed up last month, declaring their intent by triggering short-term breadth and momentum thrusts. Yet, as impressive as the display of strength was, they’re still waiting for the market to respond. Or at least the response they were hoping for. We would expect oversold conditions to reverse quickly after strong upside momentum and broadening participation. That hasn’t happened yet and bulls are showing signs of getting discouraged. If the relationship between investors and stocks isn’t going to be a two-way street, the likelihood of a broader and deeper sentiment re-set increases.
Sentiment Report Chart of the Week: Investors Not Giving Up On Stocks
