Although the Federal Reserve has not yet lowered interest rates, it has not caused a significant blow to the stock market. With the economy slowing down but still stable, and inflation remaining high, investors are confused about the future trend of the stock market.
Investors are confident about this year's trend at the beginning of 2024 and expect the Fed to cut interest rates, providing a favorable boost for the stock and bond markets. However, it turned out that the Fed did not act as scheduled. After the June meeting, the market generally expected the Fed to maintain its policy.
Despite that, the stock market has risen this year, with the S&P 500 index up nearly 15% despite the uncertainty. Now, popular sentiment indicators show that investors are hesitant about the market trend. This may be a good sign, indicating that there is further room for upward movement in the market.
Sentiment is often a contrarian indicator. Investors are not usually confident in the bull market until major economic problems are resolved, when most of the profits have usually been realized.
There are many measures designed to understand investors' psychological states. The State Street Investor Confidence Index of institutional investors shows that these investors are leaning toward optimism, but only slightly. They are more confident than last year, but much worse than in 2021, when they were on the eve of a bear market in 2022.
"We describe the current risk appetite index reading as a 'blond' scenario," he wrote in the report. The attitude "is neither too enthusiastic (overly optimistic) nor too indifferent (overly pessimistic). We believe this is a good sign for the risk asset returns this year.
Professional investors may have a more nuanced understanding of the market, but in this case their views are shared more or less with individual investors: According to the weekly survey of the American Association of Individual Investors, 39% of retail investors are currently optimistic.
In contrast, 32% are pessimistic and 29% are neutral. This one-third distribution is almost in line with the long-term historical average, indicating that today's investors do not have a clear view of the market outlook.
Another analysis of retail investors also shows a cautious attitude. According to data from the Investment Company Institute, investors withdrew about $9 billion from traditional equity mutual funds last week. Although the amount is negative, the result also shows that sentiment is close to neutral. This outflow of funds accounts for only 0.1% of the assets of these funds, which exceed $9 trillion. Last year, investors withdrew nearly $40 billion on average per week.
Corporate bond yields, especially junk bond yields, provide a window into investors' perception of stock market risk. As defaults on junk bonds tend to rise during bear markets, the rates these bonds pay compared to risk-free government bonds show the level of investor perception of stock market risk in recent months.
So far, bond investors seem to see a stable future. According to a popular index tracked by the St. Louis Federal Reserve Bank, the average yield of junk bonds is about 7.7%. The data shows that this is about 3.2 percentage points higher than comparable government bonds, one of the smallest spreads in years. This indicates that large investors are cautiously optimistic.
Overall, investors are still confused about the economic trend and market direction. However, in the absence of obvious signs of problems, the lack of this uncertainty is a good sign. This indicates that there is still room for continued growth in the bull market.