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 is likely to 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 has 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: (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 will 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 will 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, by definition) 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 next year, considering the dense complexity that underlies.

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store