Extremes of sentiment in markets

The most basic fundamental

Institutional Investor
  • Prices rise or fall in sentimental clusters that evolve in the financial markets, which are network systems of many clustered links.
  • The evaluation now may be as much financial as it is psychological, cultural, and social; that is, the exercise is as much now predictive of cash flows next quarter, or next year, as it is to predict prevailing sentiment during that period.
  • Sentiment (the reaction to new (or older) information, more than the information itself) leads to where capital quickly follows. The future bank, perhaps, will be a media conglomerate. No, it already really is.
  • There is entertainment in investment, as there is entertainment in consumption, and one may recognize this sentimental factor before the placing of a trade.
  • Sentiment can be contagious; the market is, by definition, right.
The Hustle

The biggest risk

Ticker: SQ

The third body


The sentimental vista

  • Many believe that excesses of sentiment were rooted in the individual investor community after the economic collapse of early-2020. This may be true, but it also feels like the contagion spread more broadly to the bigger money, which may well continue until the varied levels of uncertainty subside.
  • Sectors and established categories, small caps and large caps, growth and value, are increasingly dubious distinctions outside of sentiment, which can have reflexive consequences; and the rotations, ups and downs of these, throughout the year that’s passed, have set the tone of movements going forward.
  • Price action and market trends in many cases have been and will be justified by finance fundamentals — after the fact — as anything can be when there’s a will and a creative spirit, when sentiment is in actuality the driver; to draw general conclusions from the particular case will thus require caution.
  • All this poses special challenges for investors, some previously alluded to: (1) Sentiment is difficult to forecast. (2) Spotty, often capricious, and uneven, sentiment is difficult to hedge. (3) Sentimental correlations are unstable, and so portfolio construction becomes inordinately problematic.
  • Spilling over from the elements above, alternative new markets have come into their own, where price has been and always will be built on sentiment unabashedly; for instance, art, collectibles, and other assets where financial metrics play no role at all.
  • One such alternative new market, which has already started to explode, individually for the first few years but now also institutionally, is cryptocurrency; the explosion is likely to continue, driven by sentiment.
  • The most successful investors will be successful at anticipating market sentiment (and its changes) during an investment period; by necessity, therefore, investment periods will shorten at one end of the barbell, where change in sentiment is easier to grasp, and lengthen at the other end, where sentiment, over the long run, is more likely to settle down and meet with fundamentals on a common ground.
  • Over the course of time, the markets (which are always right) will incorporate the acts, extremes and fickle patterns of sentiment into an analytic system, to expand upon legacy methods of financial evaluation and economic forecast; this may not happen as quickly as this year or next, considering the dense complexity that underlies.

In an economy that can’t be trusted

  • The life-long economic plans and actions of an individual — an education, a career, a residence — are concentrated investments that can’t be easily diversified or hedged, offloaded, changed, or liquefied. From the vantage point of many individuals, the economy maps these things out, which is to say, it guides and lets us track the big decisions.
  • In 2020, so much of the economy was rendered worthless. Often permanently. On a dime… for reasons unrelated to the individual’s affairs. This was unprecedented, it is said, both in its magnitude and unexpectedness. And it has naturally left a deep impression.
  • The active retail trade that drove the market in this time was, in this way of seeing things, a sort of panic. Its flight was to liquidity, to diversification, to the hedge — those things, in other words, which are the opposite of what the natural economy presents to many — as economic plans took such an awful turn for such large numbers.
  • With markets rising fast while the economy lingers uncertain, it isn’t as has been by some suggested that the two have been “decoupled.” Nor is it that the market is six months ahead, or only that, as others keep insisting. The connection is just different now… The driver of the market is still economic, as it’s always been, but the lead is much less opportunity supply (business performance) than opportunity demand (investor flows).
  • In short, the market has become inordinately pushed by a particular type of sentiment, which is not necessarily irrational (for reasons stated). This atmosphere may take some time before it fades, as markets in the long run tend towards the business fundamentals all the same. But in the meanwhile, cold, detached, the analysis may be less quantified and formulaic than it has been in markets past…
  • … because a current price is based on an expected future price, which, more so than before is based on future sentiment…
  • … and because sentiment is different and more complex than earnings, which furthermore are not, like sentiment, contagious…
  • … and because sentiment, much more than earnings, is prone to unexpected change…
  • … and because sentiment may not be market-wide, but picks its spots, or fades from them, in isolated clusters in the market network mesh.



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