| Macquarie built a measure of equity market sentiment – the FOMO Meter – based on seven data points including asset manager exposure, individual investor sentiment and the number of S&P 500 stocks trading above their 200-day moving average.
The FOMO Meter ranges from 1.5 (FOMO) to -3 (Fear) and currently 1.21.
“When initial sentiment is this high, US stock returns tend to be below average in the following year, while ASX returns could be slightly negative,” says Macquarie.
![https://hotcopper.com.au/data/attachments/6055/6055203-97edc3fe3caaa6af8fd1544e71f5e62f.jpg](https://hotcopper.com.au/data/attachments/6055/6055203-97edc3fe3caaa6af8fd1544e71f5e62f.jpg)
“Sentiment could stay near the current level if the cycle keeps accelerating, or if the Fed does cut rates … Within the next year, we are more likely to see weaker sentiment as FOMO fades, and this would likely present a better time to buy risk.”
It’s pretty hard to deny the fact that most indicators are pretty overbought – But as is always the case, things can get even more extreme before something eventually breaks. (Or rather – When you decide to FOMO in – It breaks)
While the path of least resistance remains higher, here are my favourite data points and commentary from the Macquarie note:
- Sentiment drives the market: “If you look at the correlation of returns and sentiment, it is currently around 80%. The correlation has also been elevated since 2016 … hence that a sentiment indicator should add value to an investors' process.”
- Current sentiment suggests low returns over next year: With the FOMO Meter at 1.21 and based on past returns, the S&P 500 is expected to deliver a below average return over the next year. As a contrast, the FOMO Meter fell to a low of -1.86 in late 2022 and rose nearly 22% over the next 12 months.
- Defensives to outperform: “With the FOMO metre at 1.21, it is more likely that defensive sectors outperform cyclicals over the next 12-months.”
- The winning sectors: “If you look at the ASX sector return correlations to equity sentiment, the Technology, Media and Discretionary sectors have the higher correlation … In contrast, more defensive sectors like Utilities, Telecom and Health Care have the lowest correlations, and more likely to outperform in periods where sentiment weakens.”
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