By Philip Lawlor, head of Global Investment Research
Sentiment gauges rebounded sharply this year after a holiday-season dip, propelled by vaccine rollouts and "blue wave" US fiscal stimulus hopes. Enthusiasm for US small caps (and European stocks) is running notably high.
The chart below highlights our proprietary Composite Sentiment Indicator scores for the Russell 1000, Russell 2000, FTSE Europe ex UK and FTSE Emerging for the past year. Our CSI uses Z-scores ranging from 5 (extremely confident/overbought) to 1 (extremely fearful/oversold). We monitor extreme high or low readings for clues of impending turns in market direction, which tend to shift rapidly.
While CSI scores have spiked broadly in recent weeks, the surge in sentiment for the Russell 2000 Index has been particularly striking. At 4.7, its CSI score now exceeds its November peak and is almost two-standard deviations above its long-term average reading.
Select FTSE Russell Composite Sentiment Indicator (CSI) Z-scores
Source: FTSE Russell/Refinitiv. Data as of January 15, 2021. Past performance is no guarantee to future results. Please see the end for important disclosures.
This sentiment U-turn arrived with the marked improvement in risk appetite since the positive vaccine news first broke last November. This shift is best illustrated by the recent outperformance of copper (a highly economically sensitive risk asset) over gold (a safe-haven asset), a trend that has historically coincided with outperformance of equities over bonds, as illustrated below.
The rotation away from safe-haven assets has persisted since the pandemic lows of last March, indicating that positive COVID-19 vaccine news flow continues to outweigh concerns over second-wave lockdown restrictions and a potential slowing in economic activity in the first quarter.
Copper/gold ratio vs FTSE All-World/FTSE World Govt Bond Index (YoY % change, LC)
Source: FTSE Russell/Refinitiv. Data as of January 15, 2021. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
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