Fear Shifts Investor Sentiment Bearish as Volatility Continues | ETF Trends

Investor sentiment is changing, and while it has yet to change the direction of flows that are buoyed at year’s end by overall strong equity performance, it could be a rising tide going into next year.

Volatility continued to see equity markets struggling for the second week in a row, with news of the newest COVID variant rocking markets at the end of November and then a hawkish Federal Reserve looking to commit to faster bond tapering, blogged Mark Hackett, chief of investment research at Nationwide’s Investment Management Group.

The CNN Fear and Greed Index hit “extreme fear” as it landed on 20 on a scale from 0-100; a month ago, the number was 85, reflecting investment sentiment of “extreme greed.” It’s not the only indicator that investors are changing how they view markets going forward, as the AAII Sentiment Survey came up bears at its highest levels, the first time in over a year that it’s reflected a resoundingly bearish sentiment.

Put/call ratios are also at their highest levels this year, all indicators that investor sentiment and confidence have crumbled. This change has yet to be reflected in fund flows and is not expected to impact the end of this year, as strong fundamentals should provide a tailwind to carry markets through.

News of Omicron saw markets temporarily plummet, but they have since recovered, although volatility remains, particularly as much is still unknown. The variant appears to be highly contagious but could also cause less severe symptoms than previous iterations. Thus far, 17 states have confirmed cases, and experts are working to learn as much as they can about the newest, heavily mutated variant.

Amidst fear and volatility, investors moved to quality, stable investments; small-caps were down 11% in the last month, and the 10-year Treasury yield was below 1.4%, Hackett explained. Crypto hasn’t been immune either, with bitcoin down almost 30% since its record highs in November, but volatility is a known investment risk within the crypto space.

“Following the strength seen in the market this year, a period of consolidation is not unhealthy or unexpected. Volatility could remain elevated given a vacuum of news though year end, but strong seasonality and the fundamental backdrop provide a tailwind,” Hackett wrote.

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