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You Can’t Put a Price on Sentiment

| January 23, 2017
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Sentiment and psychology are the true boogeyman of the investing world.  Except this boogeyman just happens to be real.  Sentiment is the one of the huge drivers of stock prices, and it normally happens at the most inexplicable times.  Just when everyone throws in the towel and says enough of this.  The market will shoot up ten percent to spite you.  The inverse is also true, just when you think all is right in the world, the market drops ten percent in the blink of an eye.

Before the election, the sentiment was downright dreadful.  With two candidates who had vastly different views of how to run the country.  Business leaders who didn’t know the rules for the upcoming business year pulled back spending.  Various press corps that were under attack for not reporting one side of the story or making up news entirely.  To top it all off, you had an electorate that was utterly over the election and everything it entailed.  A pole was even done between Clinton vs. Trump vs. a meteorite hitting the earth.  The meteorite got sixteen percent. 

Even on election night the futures tanked, and half the country rejoiced with jubilation, and the other half in tears.  By morning the futures meant nothing, and the market took off for the next month.  The tone changed overnight from we’re all doomed, to that of optimism.  I don’t think Trump getting elected had very much to do with the “Trump rally.”  I think the market would have rallied regardless of who got elected.  The market likes certainty, and it got it.  The market also got certainty on interest rate policy, but none the less the sentiment changed in the market.

The sentiment largely revolved around tax reform, less regulation, and business friendly catchphrases.  Remember the market is a forward-looking mechanism, and all systems said go.  Nothing had fundamentally changed after Trump was elected, but none the less the market rallied.  Sentiment changed and the animal spirits were released.  The rally had actually been positioning itself since the summer of 2016, but it took a change in sentiment for it to breakout the way it did.  You can’t put a price on sentiment.

Sentiment and psychology are huge drivers in stock market movements, and returns.  If that’s the case than how do you put a price on that?  How does one decide when the market has gone too far too fast?  How does one decide how much euphoria, and sentiment are worth?  Many experts and analysts claim to know the answer, but it never seems to be quite right.  I think that’s why it’s important to make a plan and then stick with it.  Take psychology and sentiment with a grain of salt as much as possible.  However, that’s also easier said than done.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations of any particular security, strategy or investment product for any individuals. Information contained herein has been obtained from sources believed to be reliable but not guaranteed. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

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