Retail Investors’ Sentiment Reaches a 37-Year High: What Does That Mean For You?
RETAIL INVESTORS’ SENTIMENT REACHES A 37-YEAR HIGH: WHAT DOES THAT MEAN FOR YOU?
We’ve found one of the most time-tested measures of the current risk/reward environment for markets is to look for extremes of market behaviour. Paying attention to extremes of market behaviour can be applied to any market in any asset class to derive clues on future market trends.
The accompanying chart in this post demonstrates that the percentage of American retail investors who believe the stock market will continue to rise now exceeds 50%. This is the highest reading since 1987, a period which included the 1987 Crash, the Internet Bubble Cash, the Financial Crisis of 2008, and the 2020 COVID-induced market crash.
The current bullish extreme of retail investor sentiment is due to several factors. The strength of U.S. markets over the past 18 months has engendered an expectation that market strength will continue (known in psychology as recency bias). The recent interest rate cuts by the Federal Reserve have produced a consensus “Goldilocks” view of markets that investors will enjoy both declining interest rates and the absence of a recession.
Stock market history has demonstrated time after time that when optimism rises to extremes, investors should adopt a cautious view of markets. When the current bull market will end is uncertain, but that it will eventually end is a certainty.
We encourage investors to be prepared to practice effective risk management strategies for there is no shortage of potential catalysts for volatility which will present considerable risks but also great profit opportunities ahead.
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