22 January 2018
Bob Cunneen, Senior Economist and Portfolio Specialist
US shares vs Sentiment
Sources: Reuters Datastream, Federal Reserve St Louis.
There seems to be ‘best of all possible worlds’ scenario for Wall Street as it continues to make record highs in 2018 (black line). Corporate profits are rising and the tax rate will fall from 35% to 21% this year. US retail spending is surging and US interest rate rises should only be “gradual”.
Yet there are warning signs that US shares are displaying “irrational exuberance”. Essentially, some selective investor surveys and market measures show elevated levels of optimism on US shares. This is evident in the Sentiment gauge* (red line) which shows its highest reading in the past 20 years, eclipsing the euphoria of 2000 and 2007.
This high Sentiment gauge result suggests that investors appear to be very confident to the point of complacency on shares. Whether this is actually rational, only time will tell. But recent history suggests that when sentiment appears very exuberant on US shares, experienced investors would be contemplating heading towards the exit.
*Sentiment gauge based on VIX volatility, household share holdings, Sentix investor survey, Margin Debt and Policy Uncertainty Index
This communication is provided by MLC Investments Limited (ABN 30 002 641 661, AFSL 230705) (“MLC”), a member of the National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686) group of companies (“NAB Group”), 105–153 Miller Street, North Sydney 2060. An investment with MLC does not represent a deposit or liability of, and is not guaranteed by, the NAB Group. The information in this communication may constitute general advice. It has been prepared without taking account of individual objectives, financial situation or needs and because of that you should, before acting on the advice, consider the appropriateness of the advice having regard to your personal objectives, financial situation and needs. MLC believes that the information contained in this communication is correct and that any estimates, opinions, conclusions or recommendations are reasonably held or made as at the time of compilation. However, no warranty is made as to the accuracy or reliability of this information (which may change without notice). MLC relies on third parties to provide certain information and is not responsible for its accuracy, nor is MLC liable for any loss arising from a person relying on information provided by third parties. Past performance is not a reliable indicator of future performance. This information is directed to and prepared for Australian residents only. MLC may use the services of NAB Group companies where it makes good business sense to do so and will benefit customers. Amounts paid for these services are always negotiated on an arm’s length basis.