This year has been a challenging year for investors as uncertainties from geopolitical events, monetary policies, macroeconomic conditions, and the medical pandemic have upended financial markets. The issues will persist over the near-to-medium term timeframe, and the headwinds will continue to influence investment mindsets and consumer confidence.
Despite the rallies over the past couple of days, the overall stock market is still down significantly this year. The S&P Index (SPX) has fallen 9.5% this year, the Dow Jones Industrial Average (INDU) is off 6.89% since the beginning of the year, and Nasdaq Composite Index (COMPQ) has declined 15.13% on a year-to-date basis.
Soaring inflation, Russia-Ukraine debacle, and the uncertainties surrounding Federal Reserve rate hikes have weighed on stocks and investment psyche. Although stocks have rallied over the past two days, expect more volatility. Double-digit percentage declines are possible before U.S. stock market indexes reach sustainable bottoms.
While the Fed tightening policies remain high on investors’ minds and headline news from the Russia/Ukraine war impacts the financial markets, the state of the psyche and consumer confidence are critical factors to the sustainability of a stock market and economic recovery. Sentiment indicators convey how optimistic investors and consumers are about their finances and the state of the economy. Consumer sentiment and investor surveys are contrarian indicators that depict the economic health and the state of financial markets.
When investors and consumers are confident about the stability of their finances, it can dramatically influence spending, saving, and investment activities. A good understanding of these key sentiment measures can help traders and investors to determine if markets are nearing extreme levels.
We have an ongoing war that may or not sustain for an extended time frame. We hope the pandemic will transition into an endemic. We would like to believe the Fed understands there are considerable risks if they tighten too aggressively, they will slow the economy to the point of the next recession. And if they are too relaxed with their rate hikes, inflation will soar to much higher levels.
The question then remains – when will investors return to buying back stocks and not sellers of stocks?
Once we receive clarity from the Federal Reserve on the extent and magnitude of rate hikes, the Russia/Ukraine war subsides, pandemic turns to endemic, inflation falls, and interest rates decline, stocks will rally again. However, do not hold your breath. Instead, closely tracking investor and consumer sentiment indicators and looking for pivotal turns may be another way to help identify the next stock buying opportunity.