Continue active refreshing of this index's data?

Continue active refreshing of this index's data?

ROOF Highlights — January 8, 2024

Axioma ROOF™ Score Highlights: Week of January 8, 2024

Axioma ROOF Score Highlights will be moving home soon. For these insights and more, follow us at

Potential triggers for sentiment-driven market moves this week1:

  • US: December inflation data and speeches by several Federal Reserve officials.
  • Europe: November retail sales, unemployment and economic sentiment data for the Eurozone, and German industrial production data.
  • APAC: China’s December inflation rate and balance of trade data.
  • Global: 2023 saw a recession that never transpired and two wars that did. Until the Q4 earnings reporting season gets underway, geopolitics will continue to dominate sentiment over the next two weeks.

Insights from last week’s changes in investor sentiment:

Investor sentiment held on to a mostly bullish feeling over the holiday period. Four (Asia ex-Japan, Global Developed Markets ex-US, Global Emerging Markets, and the UK) of the five markets that ended 2023 with a bullish sentiment, started 2024 feeling the same way. On Friday last week, they were joined by a fifth market, as Chinese investors (substituting for European investors, three weeks ago), raised their hopes for the fourth time in the last six months, for that all elusive economic stimulus package from the authorities. Meanwhile, Japanese investors once again failed to identify reasons to turn bullish, deciding instead to remain just positive for now, anchoring their market gains near current levels.

Elsewhere, sentiment remained neutral and directionless among US investors given the lack of actionable news ahead of the Q4 2023 earnings reporting season later this month and the ongoing uncertainty from the chaotic domestic political environment filled with choices not even Sophie would make. Sentiment weakened slightly in Europe, from bullish at the end of 2023 to just positive now, and in Global Developed Markets from positive to neutral, weighed down by the lukewarm sentiment among US investors. Sentiment also declined slightly in Australia but remained positive.

Investors are notoriously fickle with their affection. In 2022 and for most of 2023, they viewed Fed Chair Jerome Powell as ‘He Who Trespassed Against Us’. But by the fourth quarter of 2023, as the Fed stopped pretending it was Fifty Shades of Concerned about inflation, Powell was looking more and more like ‘Prince Charming’.

Inflation is almost back to the Fed’s target, interest rates have peaked, and (3) cuts have been advertised for 2024. The economy has weathered a brutal monetary policy with barely a scratch, corporate earnings are on the rebound, and volatility remains well below its long-term median. A Goldilocks scenario none of us would have had signed up to a year ago.

The thing about Fairy Tale endings is that there is usually a price to pay. A compromise is required to get the happily-ever-after. The rise in sentiment since late November indicates that investors are willing to make certain compromises (not sacrifices) in 2024 to get their happily ever after, in the form of an economic soft-landing. But while they cheered ‘not as bad as feared’ news in 2023, they are starting the year saying ‘not that bad’ will no longer be thought of as ‘good enough’ in 2024.

That is not to say there is no downside risk left, there is. A lot of things (geopolitics mostly) can still go sideways for those on #TeamBullish. Welcome to Predictathon 2024.This is a never-ending game in which investors continuously challenge one another to predict the future direction of markets. Will 2024 be a utopia? A dystopia? Or just another myopia?

Uncertainty ruled in 2023, and in 2024 investors will continue to worry about that always-elusive patch of real estate ‘The Near Future’. Just to spice things up a tad more, fortune has thrown in no less than five (Taiwan, EU, US, Spain?, UK?) [1] contentious elections with binary consequences for investors. This is in addition to having to predict how and when the wars in Ukraine and Israel-Gaza will end. And then there is the ongoing impact of climate change (you ain’t sweat nothing yet!).

Geopolitical crises usually result in high(er) volatility, large (sometimes counterintuitive) swings in correlations, falling diversification, and periods when factor risk trumps company-specific risk. These characteristics tend to turn investors into a short-view species and for portfolios caught on the wrong side of these events, it will be sentence first, verdict afterwards. The potential for multiple leadership changes in the next twelve months in major Western democracies will make 2024 The Year of Predicting Dangerously. This is what we in the risk management biz call a ‘winter is coming’ situation.

If there was a Mount Rushmore of technology themes, AI would be carved upon it. Right next to the Internet, the Personal Computer, and Social Networks. It is the nature of investing to question the reality of past valuations, as well as the (relative) unreality of current ones: What exactly do we mean by Artificial Intelligence? Most unexpected drawdowns are the result of a failure to understand that every asset you own is connected to every other asset you do not own. Your portfolio is a part of the global capital market, not apart from it.

Once you’ve made your predictions on the sign and size of future returns, narrow down our investment options further by adjusting for both the known unknowns (predicted volatility) and the unknown unknowns (what-if scenarios). The goal of stress testing is to identify the ‘resilient’ portfolio. To paraphrase Ernest Hemingway, ‘Stress tests will break every portfolio and afterward many are stronger at the broken places.’

Make stress testing a major strategic tool in your investment process in 2024. Start by predicting where interest rates, economic growth, the stock market, the USD, etc., seem to be heading (directional shock). Identify their possible destination (size of the shock), then ask yourself if you really want to go down that road with this portfolio? If not, roll-up your sleeves, do your research, and change the portfolio if needed. Look. See. Observe. Learn. Question. Investigate. Conclude. Rebalance. Rinse and repeat.

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.

Jump to a specific market

Asia ex-Japan:

Jump to a specific market >


Jump to a specific market >


Jump to a specific market >

Developed markets:

Jump to a specific market >

Developed markets ex-US:

Jump to a specific market >

Emerging markets:

Jump to a specific market >


Jump to a specific market >


Jump to a specific market >


Jump to a specific market >


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

2 India and Russia will also have elections in 2024 but those are forgone conclusions for now. Spain and the UK do not have officially scheduled elections for 2024 but are looking increasingly likely.

Back to the top >