Blog Posts — May 12, 2020

A Sentimental Chronology: The Ascents—and Descents—of the Wall of Worry in 2020

The notion that markets “climb a wall of worry” is a commonly held view in the investment world. It refers to times when risk-averse investors, who dumped shares in the face of a risk event, gradually become more risk tolerant as markets ignore their worries and rise. Eventually, the concerns of those investors fade and they become risk-tolerant themselves, taking the market to even higher levels, as demand for risk now far outstrips the supply.

Using the Qontigo ROOF Scores, we have devised a measure of sentiment momentum designed to identify the beginnings—and eventual ends—of such climbs (or, at the very least, describe the route). This measure of sentiment momentum is based on the rate of change in the daily ROOF Ratio. We simply take the absolute value of the daily change in the ROOF Ratio[1], averaged over the last five days. This is designed to capture the speed with which sentiment is changing in either direction.

Figure 1 below shows the ROOF Ratio for the US market since January 2, 2020 up to last Friday, May 8, 2020 on the X-axis, and sentiment momentum (i.e. rate of change) of the ROOF Ratios on the Y-axis. Each dot represents the ROOF Ratio for each date and the size of the dot is based on the absolute size of the daily change (i.e., big dot = big change, small dot = small change). As a reminder, ROOF Ratio values above +0.5 are bullish, below -0.5 are bearish, and in between are neutral. Descriptions of each stage are provided below.

Figure 1: The Big Wall of Worry

A: (Jan 2 – Jan 09) Post Phase One deal bullish sentiment continues with strong momentum.

B: (Jan 9 – Jan 22) Sentiment cools slowly as the coronavirus narrative out of China becomes louder, but Trump dismisses HHS concerns as “alarmist”.

C: (Jan 23 – Feb 13) China puts Wuhan under lockdown, Singapore bans flights from China, transmission from asymptomatic carriers is confirmed, and sentiment declines more rapidly.

D: (Feb 14 – Mar 12) Sentiment continues to decline, but more slowly and sporadically after Trump says the “market is looking really good right now” and “it’s going to work out fine” and “we’re going to be pretty soon at only five people, then one or two in a short period of time”.

E: (Mar 13 – Mar 22) As the lack of credibility in Trump’s assertions becomes increasingly evident—and with coronavirus cases spiking in New York City—sentiment quickly turns very negative.

F: (Mar 23 – Apr 12) Sentiment improves rapidly, at first, as Congress passes $2 trillion CARES act and Fed turns size asset purchasing program to “unlimited”, but momentum slows as economic reality starts to sink in as 6.6 million Americans file for unemployment in March and the US overtakes Italy and China in total number of Covid-19 cases.

G: (Apr 13 – Apr 16) On April 13, US governors on the west coast and northeast announce interstate coalitions to coordinate reopening their regions. Sentiment continues to improve with higher momentum on potential reopenings amid talks of a V-shape recovery.

H: (Apr 17 – May 1) Sentiment continues to improve, but momentum drops as Trump withholds funding for WHO, announces new guidelines for reopenings, and suggests checking whether the ingestion of disinfectants could help treat the coronavirus. US Attorney General William Barr announces that cases of “overreach” will be brought against states and localities for excessively stringent lockdown measures.

I: (May 2 – May 8) Several countries and US states announce plans for partial reopenings. Sentiment continues to improve as volatility drops. More sidelined risk-tolerant investors join the ascent of the wall of worry, increasing the demand for risk assets as the supply runs dry.

A few more observations about this chart:

  • Momentum is stronger in bearish sentiment than in bullish sentiment. This is consistent with our previous observations that investors tend to exit markets with less discipline than they re-enter them.
  • Momentum is lowest in general in the neutral zone and daily changes are small (i.e., smaller dots). This is consistent with a lack of confirmation bias in that region, which means investors are less prone to overreact to news either way.
  • We have climbed to the top of the wall. Anyone feeling a bit acrophobic?

We have begun to use this new measure of sentiment momentum in our weekly ROOF Score highlights as a way to add color to changes in market sentiment. We welcome feedback on its construction and applicability from our readers.


[1] The ROOF Ratio is computed using the rolling 20-day moving average of the daily ROOF Scores adjusted for their standard deviation. It is meant to provide a more confident-adjusted measure of investor sentiment.