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How Does Investor Sentiment Relate to Markets? Fisher Investments Explains - YouTube
Channel: Fisher Investments
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Nothing symbolizes
the stock market cycle
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quite like
the bull and the bear.
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Bull markets
and bear markets
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are the two primary phases
of the stock market cycle.
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In this video, we'll start
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by taking a look
at these stock market phases,
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explain investor sentiment,
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and lastly,
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talk about
how investor sentiment changes
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throughout
the market cycle.
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Generally speaking,
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bull markets are periods
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in which stock market prices
rise over a sustained period,
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often years.
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Bear markets,
on the other hand,
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are sustained periods
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in which fundamental factors
drive stock market prices down
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about 20% or more
from a previous market peak.
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Importantly, fundamentals
drive bull and bear markets--
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stronger, strengthening
fundamentals in a bull,
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and negative or weakening
fundamentals in a bear.
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Corrections
are shorter periods
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of negative market volatility
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during a broader bull market.
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A correction is typically
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a sharp, sentiment-driven
stock market decline
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of roughly 10 to 20%,
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and unlike
during a bear market decline,
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economic fundamentals
during a correction
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are still
typically pretty sound.
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Corrections can be caused
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by just about any fear
you can think of--
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a trade dispute,
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political uncertainty,
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oil price changes,
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or for seemingly
no reason at all.
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Given this,
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and the fact
that they often end
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just as quickly
as they began,
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we believe corrections
are impossible
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to consistently time
or forecast,
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since they're sentiment
and psychologically driven,
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not fundamentally driven.
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What exactly do we mean
by "investor sentiment"?
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If the term can seem ambiguous,
well, it can be at times.
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It generally refers to how
investors feel about stocks
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in any given moment in time.
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Are they optimistic?
Are they pessimistic?
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Are they willing to pay
sky-high prices
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for low-quality
initial public offerings,
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or are they unwilling
to buy stocks
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of healthy companies
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that are trading at a price
well below their book values?
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To gauge investor sentiment,
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we look at
a variety of indicators,
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such as the economic stories
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the media and investors
are paying attention to,
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professional
market forecasts,
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or money flowing into
or out of funds.
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These are just a few indicators
that help provide
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a sense of
collective investor sentiment.
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Let's look at how sentiment
relates to market cycles.
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Investor sentiment alone
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usually does not
derail a bull market
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or jumpstart a recovery
from a bear market,
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but investor sentiment
can be a good indicator
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of what stage
the market cycle's in.
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Sir John Templeton,
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one of the 20th century's
most prominent investors,
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famously said,
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"Bull markets are born
on pessimism,
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grow on skepticism,
mature on optimism,
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and die on euphoria."
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This chart shows
the typical evolution
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of investor sentiment
during a bull market.
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At the beginning
of a bull market,
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stocks are climbing their way
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out of the depths
of the last bear market.
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We believe this process
is usually driven
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by improving
economic fundamentals
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and a gap between
perception and reality.
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In other words,
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markets tend to recover
when investor sentiment
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is more pessimistic
than appropriate,
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given the strength
of the economy.
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As markets recover,
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skepticism begins
to replace pessimism.
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While it may seem
that the coast is clear,
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investors
and financial media alike
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cannot forget the losses
of the recent bear market.
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During this phase,
you'll see a lot of
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"Are we sure it's over?"
news stories, for example.
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As the saying goes,
"time heals all wounds,"
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and before you know it,
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the market has been on the rise
for a substantial period of time
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and investors start
to get generally optimistic.
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This is when investors
feel upbeat
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about the future of stocks
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and start
to cautiously get back in.
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During this phase,
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while economic fundamentals
are typically strong,
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news media
and investors alike
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still find plenty of things
to worry about.
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Worries can include
rising interest rates,
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falling rates,
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slowing GDP growth,
rising oil prices--
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really, just about anything.
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As the bull market charges on,
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investors start to forget
what they endured
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in the last bear market,
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and this is when
widespread investor euphoria
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can set in.
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During this phase,
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headlines may seem
almost universally optimistic.
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Headlines might focus on
the next hot stock or sector
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or alternative investment.
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At this point,
you're also likely to see
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a lot of overvalued
initial public offerings
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and investors confident
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the markets
will continue to go up.
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Often, this optimism
is supported by the belief
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that "it's different
this time."
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We're skeptical
of this sort of thinking,
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which was widespread
during the dot-com bubble
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of the late 1990s.
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Investor euphoria
can drive markets up
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to the point at which
no more investor demand is left
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to drive stock prices
any higher,
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and once investor sentiment
reaches euphoria,
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reality struggles to keep up
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with these
sky-high expectations,
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which typically leads
to a bear market.
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While euphoric sentiment alone
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does not usually lead
to a bear market,
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when detached from a backdrop
of negative fundamentals,
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it can be a sign
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that a bear market
is starting.
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The typical sentiment
during a bear market
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is almost a dark mirror
of sentiment during a bull.
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It starts with the euphoria
that ended the last bull market,
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then deflates
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as economic fundamentals
noticeably fall.
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Fear increases as
the negative volatility sets in,
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then the bear market ends
in panic
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when investors have
an extreme negative reaction
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to any new information,
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even whispers.
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At this point,
many investors have little faith
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in the potential
for markets to recover,
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and they feel they won't be
able to invest in stocks again.
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At this point,
the market cycle is complete
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and the next bull market
starts.
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Keep in mind,
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every bear market in history
has been followed by a bull,
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and over time,
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bulls have been
far more powerful than bears,
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leading to stocks'
high average returns
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over the long run.
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Nobody is perfect at navigating
stock market cycles,
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even us,
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but understanding
what moves the market
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and how the different phases
of the market cycle work
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is critical
for any market forecaster,
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and it can be valuable
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for any investor
looking for a better idea
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of what to expect
from the market.
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We believe that
the more investors know,
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the less likely we are
to make mistakes
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that could set us back
from our investing goals.
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If you like this content
and would like to learn more
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about bear markets
or capital markets in general,
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please subscribe
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to the Fisher Investments
YouTube channel.
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Thanks for watching.
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