Waning optimism could move markets higher
It’s a lot better than it was this time last year, but investor sentiment is not exactly euphoric heading into 2010.
But don’t worry, says Tobias Levkovich, Citigroup Capital Markets strategist. In the near months to come, that’s probably a good sign for equity investors.
“The crisis mindset, most evident in 1Q09, has subsided in significant fashion, but excessive optimism remains absent,” he said in a note to clients.
While investors are more optimistic about the short term, Mr. Levkovich said they remain uncertain about long term issues, particularly GDP, structural unemployment and growing government deficits.
“All of these concerns can be visualized in the form of an elevated but less anxious equity risk premium and that nearly 90% of the current value of the S&P 500 can be attributed to no growth in EPS into perpetuity using trailing 12-months earnings,” he wrote.
In the past, that has been a bullish sign, and Mr. Levkovich said the slight renewal of investor panic in recent weeks could support a market rally in the next six months, particularly if strong earnings reports and pre-announcements emerge.
“We perceive that there are mixed signals and markets can move higher on such uncertainty early in 2010,” he wrote.
“However, we would keep very much attuned to any changes in investor sentiment since it may have more profound impact than is the case normally especially since we have witnessed fairly abrupt shifts in the past year.”
