Sentiment indicators have been at extremes, but investors don't seem in any hurry to take advantage of it

Published Tue, Mar 28 20239:47 AM EDT

Sentiment indicators have been at extremes, but investors don't seem in any hurry to take advantage of it. I noted last week that the monthly Bank of America Global Fund Manager Survey showed "investor sentiment close to levels of pessimism seen at lows of past 20 years," according to the survey. That is a good thing: sentiment indicators are mostly useful at extremes, and when sentiment gets this pessimistic it is usually associated with at least short-term market bottoms. Yet no one seems to want to take the bait and get more optimistic. This morning, for example, Lori Calvasina at RBC Capital Markets also pointed out that many sentiment indicators were at extremes. She noted that retail investor sentiment (indicated by the recent AAII sentiment poll) is just about as bad as it was during the Great Financial Crisis. In theory, this is good news: she notes that when sentiment gets this bad, the S & P 500 is up 15% on average over the next 12 months. Other sentiment indicators are also at extremes. The Equity Put/Call Ratio, for example, is still below late-2022 highs but is near other past extreme highs in 2010, 2011, 2014, 2016, 2018, and 2020, "at a level that is typically followed by strong S & P 500 returns on a 12-month forward basis." Money market assets have also surged and are on a par with other periods of high volatility, such as December 2018, October 2014, August 2011, and Aug 2007. Yet Calvasina refuses to take the logical next step: "The body of our sentiment work continues to suggest fear has been approaching potential peak levels, but falls short of providing U.S. equity investors with an all-clear." It's easy to see why traders seem so uncertain. It's not the recession story itself, which is old by now. It's fear that tighter credit conditions caused by the banking crisis will exacerbate and prolong a recession and, secondarily, a lingering fear that a Fed "pause" is unlikely to provide much relief for the markets. Blackrock, for example, believes that stubbornly high inflation is going to prevent the Fed from cutting rates later this year, as much of the market widely believes. "We don't see rate cuts this year — that's the old playbook when central banks would rush to rescue the economy as recession hit," the Blackrock strategists said. "We see a new, more nuanced phase of curbing inflation ahead: less fighting but still no rate cuts," BlackRock Investment Institute strategists including Wei Li wrote in a client note reported by Bloomberg. So why is the market holding up? Surprisingly, the leading barometer for stocks, forward 2023 earnings estimates for the S & P 500, which had been declining for months, have been steady for the past month. But no one seems to be taking the bait on that leading indicator either. The reason: traders are now waiting for the next shoe to drop — analysts reducing earnings due to a credit crunch from the banks not lending. But, along with the long-awaited recession, that new worry may or may not come to fruition in earnings.