When “Fringe” Sentiment Dominates Psychology

It is never wise to ignore market, economic or voter sentiment. Discount it, yes. Put it into broader context, for sure. But ignore it at your peril. As too many retailers, fund managers and politicians have discovered, the public is often a good barometer of what is occurring in the broader economy.

But not always: the public can be fickle. People are subject to all manner of cognitive biases that affect their objectivity and thought processes. There are times when sentiment is very much at odds with economic data.

That has been the anomaly for much of the past seven years or so. It demands an explanation.

Four recent articles had me thinking about this over the weekend. Running through all of these was the curious thread of negativity at odds with other, more constructive data. This has been fairly common since the financial crisis. At risk of channeling the sort of “mental recession” error made by former U.S. Senator Phil Gramm, let’s explore how and why that might be, via these four items.

The first was an article by Bloomberg News’ Tracy Alloway and Luke Kawa about the people who write for the website Zero Hedge. (Zero Hedge’s response is here). It’s a terrific story about a site that has at times provided insight on derivatives, hedge funds and high frequency trading. Outside of those market-structure issues, however, the rest of the content is “radically bearish market views.”

That bearishness is worth noting in the context of everything else that has occurred. It seems the higher equity markets went, the more bearish some market observers have become. Matt Egan of CNN Money summed this up in 2014, observing that “Even though stocks have zoomed to record highs since Zero Hedge launched in 2009, the site continues to hold serious sway among hedge funds, traders and others in finance. That’s because Zero Hedge’s dark perspective has struck a chord with the sizable portion of the public who remain deeply skeptical of the stock market and economy.”


Continues here: When Sentiment Conflicts With Investing Reality