Is Bearish Sentiment Really a Bullish Sign?

• Q1 is nearly in the books, and traditional assets have gotten battered about with rising rates and a veritable wall of worries
• Sentiment has turned very negative, but positioning remains on the aggressive side
• Our in-house equity and bond market surveys conducted last weekend suggest the mood has improved (much to the chagrin of contrarian bulls)

We’re putting the finishing touches on the first quarter. The last few months have been vastly different from the exuberance seen in Q1 2021. Recall meme stock mania, the grand reopening optimism, and a seemingly steady rise in the US 10yr yield back then.

This time around, we have seen speculative growth stocks continue to crash (albeit with a rebound in the last several days), indifference toward what is now a post-Covid world, and incredible volatile bond markets.

Stocks & Bonds See Major Q1 Selling Pressure

The 60/40 portfolio has been under siege after the first trading day of the year. IShares Core US Aggregate Bond Index ETF (AGG), a broad measure of the total US bond market, shows that it is enduring its worst stretch of real returns since its 2003 inception. Globally, the international aggregate bond index has notched its worst total return drop in history.

We all knew the time would come when bonds would begin to deliver horrid returns—all it took was some inflation to show how risky some fixed-income investments were. Still, higher yields right now mean that bonds could be viewed as much more attractive assets compared to richly-valued stocks.

Sentiment Drops Hard

How do investors feel about what has transpired in the first quarter? They’ve had it! Sentiment surveys show just how sour people are. We track several measurements to get a true feel. We also perform weekly Twitter surveys designed to reveal equity and bond market sentiment. Finally, analyzing what people are actually doing with their portfolio versus how bullish/bearish they report to be is critical.

Featured Chart: Feelings vs. Allocations

(Click on image to enlarge)

Our featured chart suggests caution. Combined sentiment survey data is incredibly bearish, no doubt about it. Is that a contrarian bullish sign? Maybe, but we are just now starting to see a rollover in bullish equity allocations. Take a look at history in the above chart: It often takes time and bigger capitulation washouts to mark a low in stocks. It’s likely we are not there yet. People can say they are pessimistic all they want, but we like to see that backed up by bearish portfolio positioning, too.