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Partly Cloudy or Mostly Sunny: Sentiment vs. Fundamentals

| February 19, 2019
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Partly Cloudy or Mostly Sunny: Sentiment vs. Fundamentals

By Joel S. Vergel de Dios

Financial Consultant, LPL Financial

 

LPL Research 2019 Outlook was released to their advisors on the week of December 17th 2018. At that point, the major indices were trending toward the notoriety of being the worst December in 80 years. The Dow and the Nasdaq indexes were already in bear market territory – having dropped over 20% from their recent peaks - and the S&P500 was headed in that direction. As I perused the newly published forecasts, I got the impression that, although LPL Research forecasts for 2019 were not as elevated as their 2018 Outlook numbers, they were still generally optimistic! “How can they be this positive?”, I asked myself. After all, they were on track toward missing arguably the most important prediction they’d made – the S&P 500 yearly performance (LPL 2018 Outlook had forecast mid-high single digit gains)!

To put things into context, the fourth quarter of 2018 was plagued with worries which dominated the headlines. Financial media feasted on reporting reasons to be fearful: peaking of the economic indicators, Fed hawkishness, ‘imminent’ recession, yield inversions, trade disputes, global slowdown and government shutdowns!

My knee-jerk assessment of LPL’s 2019 Outlook was: “To the already nervous investor, these forecasts do not seem realistic! How am I going to present this Outlook to my clients?” As I dug deeper into the material, I realized that as the subtitle suggests, during times of heightened emotion, our responsibility to our clients is to ‘Focus of the Fundamentals’! It is too easy – albeit natural – to echo the ‘wisdom of the crowd’ for immediate affirmation. But, doing so merely exacerbates the sentiment of the day – ultimately doing a disservice to the ones who look to us for rational guidance! After all, what is the difference between ‘partly cloudy’ and ‘mostly sunny’? Although I’m sure professional meteorologists have scientific definitions for each, I look at it as the same fundamental condition. The main determinant in choosing to use one term over the other is based on what one already believes or chooses to believe – a phenomenon referred to as Confirmation Bias.

Looking back at the December 24th, 2018 market bottom (S&P 500 index dipping to 2350 at the close of market), and the subsequent rally through January and February 2019, we caution against exclusively looking at the current clouds (or sunshine) to determine investment strategy. Be guided by the fundamentals. Establish and revisit time horizons, investment objectives and risk tolerances. Beware of confirmation bias!

 

 As a general rule, see below:

 

SENTIMENT

FUNDAMENTALS

Leading to…

+

+

Bull Market?

-

-

Bear Market?

+

-

Overbought? Bubble?

-

+

Oversold? Opportunity?

 

Link to LPL Outlook 2019 Handout

 The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult with your financial advisor.

 

Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC

 

All performance referenced is historical and is no guarantee of future results.

All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

 

Tracking #1-823292

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