ClockWise: Has depressed investor sentiment presented a buy opportunity?

Global equities rebounded over the last week, snapping a streak of three weekly losses to record their best weekly performance since November 2023.

Following a very positive beginning to the year, equities have had to endure a much more volatile start to the second quarter. Geopolitical fears and worries that interest rates would remain higher for longer than previously expected saw stock markets struggle, opening the quarter with their worst consecutive losing streak since last October.

Against this backdrop, last week our measure of investor sentiment moved into ‘overly depressed’ territory which we view to be a contrarian buy signal. How long we maintain our positive view on equities will depend on other factors such as how the business cycle evolves from here.

Sentiment has now picked up slightly as market levels have recovered but with retail investors still historically bearish, there is still a way to go. The last time we had sentiment at these levels was in October last year when, similarly to now, markets suffered a long losing streak on worries about geopolitical risk and rising interest rates. That proved to be a good buying opportunity (Chart 1) and was accompanied by close to a 25% rally from market lows to the end of the first quarter of 2024.

As we enter a typically volatile summer period and with our Investment Clock heading towards Overheat, both technical and fundamental factors currently supporting equities could begin to fade over the coming months. Overheat is not always a negative period for stocks. It could prove to be positive for equities should positive growth momentum feed into improving earnings outlook. However, it could be negative for stocks if compression in equity valuations amid higher interest rates outweigh the positivity from earnings.

Chart 1: Royal London Asset Management Composite investor sentiment and global stocks

Source: LSEG Datastream as at 26/04/2024

This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.