The PNC-CS Investor Sentiment Index (ISI) rose in January 2018, reflecting the fourth straight month of upward movement of the index, as optimism is seemingly spilling into the new-year. The trend of investor confidence as measured by the poll picked up momentum in the latter months of 2017 and now into 2018.
Sentiment began moving higher in October, and reached its highest level for 2017 in December. January 2018’s reading represents another move higher, as the ISI rose to 55.1, up from 54.3 in December. In general, growing optimism appears to reflect macroeconomic factors which indicate continued global growth, in addition to the strong financial markets. In December, the U.S. Congress passed the 2017 Tax Cuts and Jobs Act, which could unlock significant capital for corporations in the form of lower tax expense among other benefits. This has been viewed as a positive for earnings growth in 2018, and is helping fuel momentum in markets.
Volatility remains low by historical standards thus far in 2018 after last year’s record low levels. History would indicate volatility is likely to rise from these low levels, particularly in response to market-moving headlines, uneven economic data, unforeseen geopolitical events, or other uncertainty. U.S. financial markets shrugged off risks in January 2018 to post strong positive returns for the month. The economy continues along a path of economic expansion, even with the first look at fourth-quarter 2017 GDP slowing to 2.6% from the prior 3.2%. The job market remains on solid ground, with the unemployment rate holding at 4.1% for December. As expected, the Federal Reserve (Fed) kept interest rates unchanged in January 2018, a meeting which marked Chair Janet Yellen’s last, as the helm is turned over to Jerome Powell. Domestic stocks have benefited from continued optimism and strong fundamentals with corporate earnings and moved higher in 2017. Currently, consensus estimates for 2017 earnings growth for the S&P 500 are just slightly above 10% year over year. Fourth-quarter 2017 earnings season began in January 2018, and thus far many reporting firms have booked large one-time expenses associated with tax reform compliance.
However, forward guidance provided by companies is helping to push 2018 estimates higher, reflecting the benefit of the tax cuts. 2018 earnings estimates are currently just over 16.0% year over year. The S&P 500® rose approximately 5.6% in the first month of the 2018. Including the reinvestment of dividends, the S&P 500 returned 5.7% in January.
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?
The recent trend higher in business conditions continued from December to January. For January, Business Conditions sentiment rose to 61.0 from 59.1. 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. In January, participants remain optimistic that business conditions could improve in the next sixmonth period for large, publicly traded companies. Data published by the Institute for Supply Management (ISM®) reflects steady, still-high readings, as the published Manufacturing Purchasing Manager Index (PMI®) was 59.1 for January, versus a slightly revised 59.3 for December. Typically a reading over the 50 level indicates expansionary conditions.
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 Investor Sentiment Index Bullish/Bearish sentiment currently suggests that more poll participants are bullish than bearish about U.S. stock markets in January than in any month in 2017. Participants became more bullish as we moved through the months of 2017, a trend which continued in the first month of 2018. Bullish versus bearish sentiment trended slowly higher through 2017; a pickup in pace was noted in the second half of the year. The January 2018 reading of 59.6 outpaced December 2017’s reading of 57.5, as well as any reading for any month last year. This implies that more than half of poll respondents held a more bullish than bearish view.
As we have noted above, financial markets have also reflected growing optimism as 2017 progressed, particularly in the late months as tax reform legislation optimism increased, culminating with Congress formally passing a bill in late December. Consumer confidence as measured by the Conference Board surged in January 2018 to 125.4 from December’s slightly revised higher reading of 123.1, helped by continued economic expansion in the United States, and solid labor and financial markets.
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 if they would be more or less likely to invest in stocks six months from now versus current levels. Individuals are likely to respond to headlines from a more personal view than the business community. Personal Investment sentiment was an outlier this month, as expectations slightly softened in January, likely a result of the strong markets. For January, sentiment tempered to 44.5, down from December’s 45.5.
The PNC-CS Investor Sentiment Index (ISI) poll results for January in general depict investors as continuing to grow more optimistic in the first month of 2018 than in prior months in 2017. Investor Bullish versus Bearish sentiment rose, as did the poll reading for Business Conditions. From a Personal Investment perspective, respondents were slightly less optimistic in terms of investing in stocks six months from now then they were in December.
The next PNC-CS Investor Sentiment Index will be published in March.