The PNC – CivicScience Investor Sentiment Index (ISI) reflected an easing of investor sentiment in February 2018, the first monthly dip since September 2017. Investor sentiment, as measured by the poll, had been on an upward trend for the latter half of 2017 and into 2018. However, February’s poll reflected a slightly lower level of optimism versus January 2018.
Sentiment in January reached its highest level since the poll began in November 2016. February 2018’s poll results reflect a pause in optimism as the ISI declined to 52.3 from 55.1 in January. After record low volatility in 2017, markets were surprised by a quick bout of instability which hit financial markets in February. Despite the continued strong economic data and corporate earnings, markets were unhinged by various headlines surrounding volatility – specific investment products, as well as broader market uncertainties.
While we expected volatility would rise from the record low levels of last year, the swift return caught many investors off guard. 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. In mid – February, the S&P 500® traded lower, crossing through 5% and 10% correction levels. Despite dropping more than 10%, the S&P 500 recovered some of these losses, and for the month ended 3.9% lower versus January.
As the fourth – quarter 2017 earnings season progressed throughout February, most notable was the forward guidance provided by U.S. corporations, resulting in upwardly revised expectations for 2018 earnings. The growth rate for S&P 500 earnings is now 18.0% year over year, up from the 12.0% estimate at the start of the year.
The economy continues along a path of economic expansion, with fourth – quarter 2017 GDP growth at 2.5% year over year. The job market remains on solid ground: the unemployment rate held at 4.1% in January while inflation has not realized an acceleration. The Consumer Price Index held at 2.1% year over year in January. Forecasting the Federal Reserve has also played into investor sentiment, with worries that there will be four interest rate hikes in 2018 instead of three. PNC continues to forecast three rate hikes in 2018.
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 was a bit softer in February versus January. The Business Conditions reading moved slightly lower to 58.2 in February, from the prior 61.0. We note that the tax reform legislation includes corporate tax cuts and other potential benefits for companies. This may have affected how poll participants viewed business conditions, likely adding to the stronger readings in December 2017 and January 2018. Despite the softer reading for the month, February poll results reflect continued optimism that business conditions will be positive in the next six month period for large, publicly traded companies. From an economic data perspective, manufacturing conditions remain robust. The February Institute for Supply Management (ISM®) Manufacturing Purchasing Manager Index (PMI®) was 60.8 in February, higher than the 59.1 for January, and is the fastest pace of expansion since May 2004.
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 February; however, they were less bullish than in January. Bullish sentiment rose throughout 2017, a trend which continued in January 2018 but eased in February.
Bullish versus Bearish sentiment was trending slowly higher in the first months of last year before picking up in pace in the second half. After hitting a high in January 2018’s reading, the February 2018 reading of 55.1 is lower the prior 59.6 and is the lowest reading in five months.
Despite financial market volatility in February, economic indicators remain solid. Consumer confidence as measured by the Conference Board rose in February 2018 to 130.8, the highest reading in 17 years, owing to optimism in response to the federal tax cuts and 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 in the next six months versus their current view. Individuals are likely to respond to headlines from a more personal view than the business community. Personal Investment Sentiment softened for the second month in a row. February sentiment declined to 43.7, down from January’s 44.5.
The PNC – CivicScience ISI poll results for February indicated a slightly tempered view of optimism versus the high January 2018 reading. Investor Bullish versus Bearish sentiment declined, 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.
The next PNC – CivicScience Investor Sentiment Index will be published in April.