Personal Wealth Management / Expert Commentary

Fisher Investments Reviews How to Gauge Investor Sentiment

Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer, Ken Fisher, discusses what investor sentiment today means for stocks. Ken quotes Sir John Templeton who said, “bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” In this framework, he believes sentiment today is likely in early stages of optimism.

While Ken acknowledges measuring investor sentiment is an imprecise science, he thinks it’s more important to observe when sentiment is extreme—either heavily pessimistic or euphoric. Amid a bull market, Ken says sentiment can be volatile and typically doesn’t indicate much about market direction. Until there are more concrete signs of euphoria—such as a material increase in low-quality IPOs—Ken remains bullish.

Transcript

Ken Fisher:

So I'm often asked what I think about sentiment at any given point in time, and I get asked that pretty regularly. Sentiments a sometimes tricky thing to do, sometimes easy thing to do. As I've repeatedly say over and over again pretty much every month of my life. At John Templeton famously said, and I always adored John Templeton when I was younger.

Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria. The power of sentiment is most particularly strong when you either have heavy pessimism or heavy euphoria. We're now at a stage as I measure sentiment that's transitional from late stage skepticism to the beginnings of early budding optimism.

We're clearly not in euphoria, because when you're in euphoria, you have lots of telltale signs, like abundant new offerings of equity that are low quality through the course of a bull market. In this stage we're in now, you get, as we're having now, the beginnings of IPOs that had been being held back from years before, because the market was too bad and they couldn't get adequate pricing.

You get those initial higher quality IPOs and then later you get this rapid fire creation of garbage companies, taking advantage of the euphoria to get cheap money publicly. And you see all those lousy quality IPOs. And that's a telltale sign of euphoria. A little bit a little bit like we had a little bit of with the SPACs in 2021 going into 2022.

In extreme pessimism phase. You've got people always thinking everything will be terrible, markets will go down. This is different this time. And of course, another one of John Templeton's famous phrases is the four most dangerous words in the English language are it's different this time, but it always looks a little different and it never really is.

And that extreme pessimism is different this time. Everything is going to be terrible. It's going to go on for a long time. We're going to have this, that and the other. Da da da da da da da. That's all telltale signs of extreme pessimism. And that's really bullish. Extreme euphoria, bearish. In the stage we're in right now little shifts in sentiment in between skepticism and optimism don't really tell you much about market direction.

I would step back and say, as I have been saying from October 22nd on. We've been having a bull market and inside a bull market you get volatility. That's normal. And sometimes that volatility is impacted a little bit by sentiment shifts.

You can measure sentiment a little bit in time periods like this. By looking at professional forecasters forecasts in aggregate of what they think the market will look like 12 months ahead, which you can find if you put in a little work by looking online and then seeing is that argue for market rising a lot from here, in which case you got a fair amount of optimism falling from here? In which case you got pessimism or not doing much, in which case you've got that balance that I talked about now of skepticism to optimism.

Another way to see the sentiment shift is to see our economic expectations for standard economic data like CPI, unemployment, GDP, etc. , coming in consistently, markedly better or worse than those expectations. If they're coming in markedly better, people were too dour. If they're coming in markedly worse, people were too optimistic. But little shifts again, don't tell you much because when sentiment isn't too extreme one way or the other, it really doesn't tell you where markets are headed.

What I would say is once you're in a bull market like we're in now, sentiment isn't the most precise measure that you need to determine market direction. You can't determine market direction in the very short term anyway because stocks are way too volatile.

But a bull market continues as John Templeton said famously, until you hit that euphoria stage. And that's pretty much always true. And that's my story and I'm sticking to it. So I want to thank you for listening to this, and I hope you found it useful and enjoyable.

Voice of Ken Fisher:

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