April 2, 2024
The S&P 500 was up over 10% in the first three months of 2024, marking the best first quarter performance since 2019. Better-than-expected economic growth, improved earnings, artificial intelligence enthusiasm, disinflation and the promise of rate cuts have all contributed to the market’s rally.
Unsurprisingly, there has been a corresponding move higher in investor sentiment, as optimism surrounding a soft landing has increased since the start of the year. In fact, the Ned Davis Investor Sentiment Index recently hit 73.5, its highest reading since November 2021. Sentiment has rarely been more positive, as the index has only been higher 1% of the time since 1996.
As a contrarian indicator, elevated readings of investor sentiment can signal that markets are more vulnerable to consolidation. Historically, when sentiment has been elevated, as measured by a level above 73, stocks produced average returns of -0.9% and 1.6% in the forward 3- and -6-month periods, respectively.
Despite the potential for near-term consolidation, market fundamentals support our constructive outlook for equities over a longer period. Therefore, we believe investors should stay invested and diversified, and they should avoid timing the market.
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