Investor Sentiment Continues to Soften

2018-05-08T14:59:13+00:00 April 11th, 2018|

Overall Index

In March 2018, for the second month in a row, the PNC – CivicScience Investor Sentiment Index (PNC – CivicScience ISI) reflected a softening in confidence. Investor optimism, as measured by the poll, had been steadily rising from September 2017 through January 2018. A sharp turn lower was recorded in last month’s reading, with further easing in March.

After sentiment in January reached the highest level reading since the poll began in November 2016, February’s results reflected a shift in expectations. March 2018’s poll results further highlighted a more cautious view, as the PNC – CS ISI declined to 50.4 from 52.3 for February. Softening optimism, in our view, follows how the broader market has traded, as volatility returned to the financial markets in February and continued into March. Numerous headlines led to market jitters and put downward pressure on U.S. stocks. Despite the continued strong economic data and corporate earnings, political headlines, Information Technology (Tech ) sector scrutiny, and worries over potential trade wars kept market volatility elevated through March.

It is normal for stocks to experience declines from time to time, and U.S. equities had gone longer than normal without any type of correction. The S&P 500 dropped 10% after hitting a record on January 26, 2018, through February 8, 2018. Following this decline, stocks initially recovered, but trade war tensions and Facebook privacy controversy which precipitated a Tech selloff have kept markets in correction territory.

Fourth – quarter 2017 earnings season concluded early in March, and the forward guidance for 2018 earnings is quite strong. The forecasted growth rate for full-year 2018 earnings for the S&P 500® is 18.5% year over year, up from the 12.0% estimate at the start of the year. Markets will get a first look at 2018 profits mid – April as the first quarter reporting season commences.

The economy continues along a path of economic expansion, with fourth – quarter 2017 GDP revised higher to 2.9% year over year. The job market remains on solid ground, as the unemployment rate held at 4.1% for another month in February and inflation remains in check. The Consumer Price Index expanded 0.1 percentage point in February to 2.2% year over year. As expected the Federal Reserve (Fed) increased interest rates by 25 basis points at the March Federal Open Market Committee Meeting. The median forecast from the Fed continues to point to a total of three hikes in 2018, which is in line with PNC’s own forecast.

Individual Poll Questions

Question 1: Six months from now, do you think business conditions overall will be more favorable or less favorable to large, publicly traded companies?

Sentiment surrounding Business Conditions softened for a second month in March. The Business Conditions reading dipped to 54.3 in March, from the prior 58.2. We note that the tax reform legislation includes corporate tax cuts and other potential benefits for companies which could have affected how poll participants viewed business conditions, likely adding to the stronger readings in December 2017 and January 2018. Tensions over potential trade wars continue to dominate headlines as clarity surrounding President Donald Tru mp’s tariff announcements unfold. While the poll-reading declined, the March reading continues to suggest that businesses remain optimistic regarding conditions in the next six – month period for large, publicly traded companies. From an economic data perspective, manufacturing conditions remain robust. The March Institute for Supply Management (ISM®) Manufacturing Purchasing Manager Index was 59.3 for March, a very strong reading, while slightly below the 60.8 for February.

Question 2: When it comes to U.S. stock markets, would you say that you feel bullish (optimistic) or bearish (pessimistic) right now?

The PNC – CS ISI Bullish/Bearish sentiment suggests that more poll participants are bullish versus bearish about U.S. stock markets in March, however, were less Bullish than in the prior two months. Bullish sentiment rose through the months of 2017, peaking in January 2018 before beginning to ease.

Bullish versus bearish sentiment accelerated in the second half of 2017 to a peak in January 2018. In February the sentiment reading dipped to 53.0 from February’s 55.1, and is at the lowest reading since last spring.

Fundamentals remain solid, and the economic expansion is forecast to continue in 2018. Retail sales indicated some softening, which could lead to a temporary dip lower in economic growth in the first quarter. Consumer confidence as measured by the Conference Board declined from February’s 17 – year high of 130.0 to the March reading of 127.7, owing to continued optimism in response to the tax cuts and the continued strength in the labor market.

Question 3: Six months from now, do you expect to invest in stocks/equities at a higher or lower rate than you are currently investing?

Sentiment towards Personal Investment asks poll participants to consider whether they will be more or less likely to invest in stocks six months from now versus their current view. Individuals are likely to respond to headlines from a more personal view than the business community. Personal Investment Sentiment turned surprisingly higher. March sentiment rose to 44.1, from February’s 43.7.

Summary

The PNC – CivicScience Investor Sentiment Index (ISI) poll results for March indicated a softening view of optimism, versus February and January 2018 readings. Investor Bullish versus Bearish sentiment declined, as did the poll reading for Business Conditions. From a personal investment perspective, respondents were slightly more optimistic in terms of investing in stocks six months from now.

The next PNC – CivicScience Investor Sentiment Index will be published in May .