Optimism is at its lowest level since the outbreak!Time for a rally?

2022-05-08 0 By

Stocks have had a rough start to the year.The S&P 500 is down nearly 8% for the year.While the decline was modest, there was a degree of panic.Still, that’s usually a good sign for markets, and investors could become more confident afterward.The main factor driving the downward trend in U.S. stocks is investors’ expectations.The Fed is expected to raise interest rates multiple times to curb high inflation and reduce its holdings of U.S. debt.That means less money will flow into the bond market, pushing yields higher and prices lower.Higher interest rates mean slower economic growth, and higher long-term bond yields reduce the value of companies’ future profits, thus lowering stock valuations.On top of that, the possibility of a deterioration in the situation between Russia and Ukraine would prompt the US or Europe to impose sanctions on Russian oil.Such a move would reduce global supplies, push up oil prices and fuel the high inflation that consumers have to deal with and the Fed is trying to contain.The mood for U.S. stocks could not have been worse.Only about 21 percent of investors are bullish, according to Truist, according to a survey by the American Association of Individual Investors.This is almost the lowest level of market sentiment in the entire pandemic period.The good news, however, is that confidence tends to be higher after this period.With investors’ expectations for the economy and corporate earnings lower, any news that comes in slightly better than expected can send stocks higher.Keith Lerner, chief investment officer at Truist, said the “expected earnings decline” showed that expectations for good news had fallen to a tipping point where even a bit of good news could be positive for the market.This week, news of a detente between Russia and Ukraine gave U.S. stocks a boost.In the short term, when sentiment turns as bad as it has recently, markets tend to see steady gains for the next year.Investor sentiment data from ROYAL Bank of Canada also suggest confidence will grow.Historically, when sentiment bottoms out, the S&P 500 typically returns 20 per cent or more over the following 12 months, according to the bank.So perhaps the extent of the Fed-induced slowdown remains an open question.What Russia will do next is unclear.But for those with a longer-term view, now may not be a bad time to start buying stocks.