My 2024 outlook projected a strong year for global stocks, with the TSX lagging early before a late revival. So far, so good on that call. World stocks notched 15.9-per-cent gains through June 14, far ahead of the TSX’s 4.7 per cent. More gains await – globally and even in Canada, where the lag and a June swoon has deepened pessimism.
Sound counterintuitive? Consider: Stocks move most on the gaps between expectations and the subsequent reality. So gauging sentiment – what investors anticipate markets doing – is crucial. There are hard and easy ways to do it. Today, both signal more bull market ahead. Let me explain.
As legendary investor, Sir John Templeton famously said, “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” Recent examples: After 2020′s rocket-ship recovery from lockdown lows – themselves born in despair – 2021′s sentiment warmed unusually fast. Frothy pockets emerged in special-purpose acquisition company IPOs and crypto, with the latter spurring Canada’s 2021 groundbreaking bitcoin ETF approval.
Lofty sentiment made stocks susceptible to negative surprises, which included Ukraine, inflation, rate hikes, supply chain chaos and a plunge in world stocks. Of course, the TSX’s large energy weight cushioned the blow in Canada. Nevertheless, by mid-2022 long-running fears drove irrational pessimism, fostering a positive surprise and this global bull market’s birth.
Sentiment has since warmed – somewhat. Bank of America’s May fund manager survey revealed the most bullishness since 2021, tempered by falling global economic expectations. The May Business Barometer Index from the Canadian Federation of Independent Business hit its highest level in nearly two years, yet remains muted overall. Respondents’ sunnier outlooks – before the TSX’s recent dip – likely belie recent dourness, too.
U.S. and global confidence surveys broadly show brighter outlooks. But skepticism remains, especially in Europe after its EU parliamentary elections.
Yet bears wrongly argue we have fast-forwarded to euphoria. They cite events such as war in the Middle East and Chinese weakness as evidence that investors are overly cheery, while claiming only a handful of stocks underpin this bull market. Wrong! Nearly 29 per cent of global stocks outpace the MSCI World Index year-to-date.
So how can you assess sentiment? Start with one labour-intensive method I like: plotting sentiment bell curves. The consensus of professional investors’ forecasts actually reflect sentiment, revealing which outcomes are widely expected, and which aren’t. Of course, this doesn’t foretell what will happen. But it shows what people think will happen and, hence, what markets are pricing – a sentiment signal. And the consensus is always wrong.
Consider recent years’ forecasts for the S&P 500 versus actual returns: At 2018′s start, the median forecast envisioned 5.3-per-cent gains, excluding dividends. In reality, stocks fell 6.2 per cent! For 2019, the median forecast was for gains of 15.8 per cent – about half the 28.9-per-cent final result. 2023′s projection? A middling 9.4 per cent – far below stocks’ actual 24.2-per-cent surge.
Entering 2024, the median forecast was for a gain of 1.8 per cent. Upward revisions boosted that to 4.8 per cent by mid-April – yet still nowhere near U.S. stocks’ long-term 10.2-per-cent annualized average return without dividends or their 15.4 per cent year-to-date return! Hardly “optimistic” sentiment.
Look deeper. Of 54 professional S&P 500 forecasts entering 2024, 40 clustered between a loss of 2.9 per cent and a 9-per-cent gain, while nine envisioned declines worse than 3 per cent. None foresaw returns exceeding 17.1 per cent. Now? Despite some firms’ sunnier outlooks, still none expect 17 per cent or greater. Euphoria? Hardly.
An easier sentiment-tracking tool: Watch how economic data compare with prior estimates. You can find consensus forecasts for GDP, inflation, employment and more on many financial and economic news websites. Are most results undershooting estimates? Then sentiment may be too optimistic. Are they beating? Then it’s too dour.
Low expectations mean even mediocre results don’t doom stocks. Most key global data are trending above estimates currently, which spells bullish. In Canada, Ivey Business School’s all-sector May purchasing managers’ index missed expectations badly. But three of the prior four readings beat. Watch trends, not single readings.
Consider initial public offerings, too. I have long said IPO actually means “It’s probably overpriced.” Companies do IPOs when prices are best for sellers (founders and early investors) – not buyers. Heavy issuance usually follows a big market rise, when recent returns boost spirits and elevate demand.
Today? After 2023′s dearth of global IPOs, issuance is up in America, Europe and globally – yet it remains muted overall. Canada’s “IPO drought” trudges on mercilessly, after more than a year of no new listings. Globally, most issuance is from quality firms. Many use the proceeds to retire costlier debt. Nothing euphoric there.
Whether you choose easy or hard methods, tracking sentiment is key. Today, it all signals more gains ahead.
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