To The Moon

Investor sentiment declined across all markets we monitor, except Japan. In Japan, investors grew more bullish following better-than-expected inflation data, which reduced the likelihood of the BoJ raising interest rates soon. Sentiment ended the week negative among investors in Asia ex-Japan, Global Developed, Global Emerging markets, and Europe. Meanwhile, sentiment weakened to a neutral stance in China, Global Developed ex-US markets, the UK, and the US.

China: Having observed the property market’s decline over the past three years, Chinese authorities have now introduced a substantial support package to stabilize the real estate sector. However, the design of these measures indicates that China’s leadership still believes an economy growing at 5% does not require additional stimulus. The real concern for investors is not whether the economy is truly growing at a 5% rate (it isn’t), but the significant decrease in consumer demand and private sector investment. This crisis of confidence complicates China’s transition from a debt-financed, industrial output and export-reliant model to one driven by domestic demand and consumer spending. Investor sentiment and markets are likely to remain under pressure until additional demand-focused stimulus is unveiled, as investors anticipate further economic headwinds from the incoming Trump administration after January.

The US: Earlier this month, American voters voiced their dissatisfaction with the current government, deeming it broken. Over the past three years, housing prices have continuously climbed, editing the dreams of potential homeowners from floating in pools to drowning in debt. They elected an anti-establishment candidate, who has quickly appointed other anti-establishment figures to his reconstruction team. Now that we know the ‘Who,’ we need to understand the ‘How.’ The burning question for investors is whether all of Trumps horses and all of Trump’s men can put Humpy Dumpty back together again. They may have to wait until January 21st to find out.

Rest of the World: Investors in Europe, Asia, and Global Emerging markets, relegated to the role of casual observers, have been closely monitoring events in the US and China, adjusting their portfolios and moods reactively. The lack of a comprehensive plan from either leadership team on addressing both domestic issues and their bilateral relationship has created an uncertainty bubble. Jamie Dimon, the CEO of JPMorgan Chase, recently warned that the world is entering its most dangerous time in decades. Meanwhile, his bank announced record profits, significantly beating analysts’ expectations, and making him the second highest-paid bank CEO in the world. It seems to be the best of times for those warning investors it is the worst of times.

In the uncertainty bubble, investors are both frustrated by other investors’ increasing negativity and astonished by others’ naive positivity. It’s like a Schrödinger’s box where investors are simultaneously risk-tolerant and risk-averse, until the veil of ignorance is finally lifted.

Predictability is the missing ingredient in investors’ forecasts, without which they cannot get enough confidence to increase their risk tolerance. Invest without it, and the chances are high that reality will fail to meet expectations – the something did not get enough whatever, the whatever got too much something, things are rising too much, others are failing to rise. With high uncertainty, investors forecast, and fortune laughs. What they least expect, fortune warns, expect it.

Potential triggers for sentiment-driven market moves this week[1]

• US: PCE inflation, personal income and spending, durable goods, and consumer confidence data. FOMC meeting minutes. Turkey, stuffing, and shopping.

• Europe: Eurozone inflation, economic sentiment, and consumer confidence data.

• APAC: Japan retail sales, industrial production, and unemployment data.

• Global: Approaching the three-year mark, the conflict in Ukraine has entered its most dangerous phase as January 20th nears. Additionally, with Iran vowing to retaliate against Israel before then, investors are on high alert for a significant security risk event in December.

[1] If sentiment is bearish/bullish, a negative/positive surprise on these data releases could trigger an overreaction.

Note: green background = bullish, red background = bearish

Changes to investor sentiment over the past 180 days for the markets we follow:

How to Interpret These Charts:

Top Charts:

The top charts illustrate the ROOF ratio, which represents investor sentiment. This ratio is depicted in green on the left axis, while the cumulative returns of the underlying market are shown in black on the right axis. Key reference lines include:

• A horizontal red line at -0.5 (left axis), marking the threshold between negative sentiment (-0.2 to -0.5) and bearish sentiment (< -0.5).

• A horizontal blue line at +0.5 (left axis), indicating the boundary between positive sentiment (+0.2 to +0.5) and bullish sentiment (> +0.5).

• A horizontal grey line at 0.0 (left axis), around which sentiment is considered neutral (-0.2 to +0.2).

Bottom Charts:

The bottom charts display the levels of risk tolerance (green line) and risk aversion (red line) within the market, representing investors' demand and supply for risk, respectively. Key insights include:

• When risk tolerance (green line) exceeds risk aversion (red line), more investors are willing to buy risk assets than there are investors willing to sell them at the current price. This scenario forces risk-tolerant investors to offer a premium to entice more risk-averse investors to trade, thereby driving markets upward.

• Conversely, when risk aversion (red line) surpasses risk tolerance (green line), the market dynamics reverse.

The net balance between risk tolerance and risk aversion levels is used to compute the ROOF ratio shown in the top charts, reflecting the sentiment of the average investor in the market.

Blue Shaded Zone:

The blue shaded zone between levels 3 and 4 for both indicators signifies a reasonable balance between the supply and demand for risk in the market. When both lines remain within this blue zone, the market is considered stable. However, when both lines move outside this zone, the significant imbalance in demand and supply for risk can lead to overreactions to unexpected news or risk events.