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ROOF Highlights — February 5, 2024

Axioma ROOF™ Score Highlights: Week of February 5, 2024

Please note that the ROOF Highlights will be off next week for the Chinese New Year holidays, and will return on Monday February 19. For these insights and more, follow us at our new home www.Simcorp.com

Potential triggers for sentiment-driven market moves this week1:

  • US: Speeches from several Federal Reserve officials, Services PMI data, and earnings reports from McDonald’s, Caterpillar, Eli Lilly, Amgen, Walt Disney, Uber, S&P Global, and Philip Morris.
  • Europe: Germany’s factory orders and production data and retail sales for the Eurozone.
  • APAC: Bank of Australia interest rate decision. China PMI and inflation data.
  • Global: Any retaliation to the retaliation, or further escalation from the escalation in the Israel-Hamas war.

Insights from last week’s changes in investor sentiment:

Investor sentiment ended mixed last week, rising in the US, Europe, Japan, Global Developed, and Global Developed ex-US markets, but declining in Asia ex-Japan, Australia, Global Emerging Markets, the UK, and China. Investors in the latter are becoming increasingly bearish in the face of a silent response from the authorities. Sentiment in the major markets of the US, Europe, and Japan continues to be driven by the pivot industrial complex, and despite last week’s push-back from central bankers, investors remain convinced that the future direction of interest rates has decidedly pivoted to the downside now. #NotIfButWhen.

The US: The US economy is turning into one of the biggest of ironies, with the highest interest rates in decades seemingly facilitating in a red-hot jobs market and unstoppable consumer spending. After Friday’s stronger than expected job report, investors reached for their Pivot Hymn book, ripped out the chapter on a March rate cut, and gave it a proper Viking funeral on the East River. They have now turned to the chapter on a May rate cut. #BecauseWhyNot.

China: Chinese investors keep expecting the authorities to wake-up at any minute, like Adam and Eve suddenly realizing they were walking around naked this whole time, and for the authorities to confess they now see that an uber stimulus is needed. The sharp rise in market volatility reflects the very tenuous line dividing the prospect for gains from a potential stimulus package that drove the market up two weeks ago, and which risks turning into a cautionary tale about investor gullibility and speculative losses in the following weeks. The authorities, for their part, are learning that fear, like misery, loves company. #EmperorNeedsClothes.

Europe and the UK: European investors feel that central banks and inflation magically (not really because massive rate hikes were involved) no longer have to play this cat and mouse game because both, spiritually, are dog people now. Inflation should continue to decline on the back of previous rate hikes, and the ECB/BoE can now move on to caring about the economy. #BecauseWhyNot.

Corporate Earnings: With 46% of Q4 2023 earnings reports in, the (FactSet) blended earnings growth rate is only +1.6%. This is the second quarter of positive growth, following Q3’s +1.3%, but still well below historical averages and far from deserving current valuations. Investors are optimistic that the remaining reports, mostly from consumer spending-related sectors, will boost the blended rate in the coming weeks. #ThingsNewbiesSay.

Looking forward: Investing is forecasting. Investors constantly look to the future. They think, “We wish we were there, not here”. But then they get there. And they think, “We thought here would be different. We thought here would be more like there. But it’s more like here again”. And it never ends. #RinseAndRepeat.


Note: green background = bullish, red background = bearish

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

How to read these charts: The top charts show the ROOF ratio (investor sentiment) in green (left axis), against the cumulative returns of the underlying market in black (right axis). The horizontal red line at -0.5 (left axis) represents the frontier between a negative sentiment (-0.2 to -0.5) and a bearish one (<-0.5), and the horizontal blue line at +0.5 (left axis) represents the frontier between a positive sentiment (+0.2 to +0.5) and a bullish one (>+0.5). Around the horizontal grey line at 0.0 (left axis), sentiment can be considered neutral (-0.2 to +0.2).

The bottom charts show the levels of both risk tolerance (green line) and risk aversion (red line) in the market. These represent investors’ demand and supply for risk. When risk tolerance (green line) is higher than risk aversion (red line), there are more investors looking to buy risk assets then investors willing to sell them (at the current price), forcing risk-tolerant investors to offer a premium to entice more risk-averse counterparts to take the other side of their trade, which drives markets up. The reverse is true when risk aversion (red line) is higher than risk tolerance (green line). The net balance between risk tolerance and risk aversion levels is used to compute the ROOF ratio in the top charts, representing the sentiment of the average investor in the market.

The blue shaded zone between levels 3-4 for both indicators, represents a reasonable balance between the supply and demand for risk in the market. Conversely, when both lines are outside of this blue zone, the large imbalance in the demand and supply for risk can lead to an overreaction to unexpected news or risk events.

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Asia ex-Japan:

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Australia:

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China:

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Developed markets:

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Developed markets ex-US:

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Emerging markets:

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Europe:

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Japan:

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UK:

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US:

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

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