Short and concise analysis on concepts or recent events in the financial markets from the ASG Capital Team.
This podcast is entitled Be aware of a change in sentiment. 2022 was a very poor year for the performance of many assets. Some of the drawdowns range from severe to historic. January 2023 kicks off with investor sentiment remaining generally cautious. However, this could change on a turn of a dime.
Settled markets, reduced geopolitical chaos and less aggressive interest rate policy could coagulate to bring us to a very different investor mindset. Algorithms could move to being bullish. Trading robots picking up on this new trend would amplify the movement. Investment shorts would be forced to cover sideline defensive cash would be sucked back into markets as investors try to profit from these new conditions or attempt to make up for past loss performance. The short-term reaction could then overwhelm any medium-term considerations. As the pendulum of capital flows would be swinging from one extreme to another. Investors outright fear could switch to just a fear of missing out.
If such a change in sentiment were to take place, how long it would last would depend on the Central Bank’s reaction to it.
The point of tightening monetary policy in 2022 was to take off the table the excesses of loose monetary conditions perceived to be fueling general inflation. With inflation objectives yet to be achieved, the Federal Reserve may consider any bullish, irrational exuberance as premature and decide to contain it. In doing so, tightening the monetary screws could bring back a return to more various sentiment once again.
Excessive swings from bearish to bullish and back again, could, in turn, upset the delicate balance in what has become the capital market’s primary function. That of refinancing a massive stock of existing debt. Therefore, investors should be aware of excessive changes in sentiment.
This podcast is for information only and should not be considered as investment advice. We would recommend seeking professional investment advice when allocating to any asset.