The PNC-CivicScience Investor Sentiment Index (PNC-CS ISI) ticked higher again in September, reflecting further upward momentum. Investor optimism, as measured by the poll, has reached its highest level since January 2018. After peaking in January at 55.1, sentiment began to fade, falling to a 2018 low of 48.8 in April. Since then, the index has fluctuated within a fairly narrow range, however, the September reading of 52.4 reflects growing optimism after August’s reading of 50.5 was also an increase from the prior month.
The September 2018 results reflect a fairly sizable uptick in optimism from poll participants. Trade war uncertainties with China escalated further, with the imposition of an additional 10% tariff on $200 billion worth of goods. While still manageable, mounting tariffs could have some impact on U.S. consumers, and, in turn, economic growth. Current estimates put the cumulative effect of all U.S. tariffs imposed or announced at approximately 0.32% of GDP spread over the remainder of 2018 and 2019. That said, trade progress with Mexico, and now Canada recently resulted in a new multilateral trade agreement between the three countries. Further signs of broad economic strength include second-quarter U.S. GDP being revised up to 4.2% from 4.1%, reflecting upward revisions to business investment and net trade, as demand was pulled forward on trade tensions. Additionally, the latest figures on capital expenditures show an increase of 12.9% year over year. This implies that corporations are still confident in the continuation of the economic cycle, and therefore willing to reinvest back in their businesses.
Earnings estimates continue to look very strong for the second half of 2018, and investors appear to be focused on the positive fundamental story playing out within the United States. Stocks have recovered all of what was lost earlier in the year, and continue to press higher. The S&P 500® total return in September was 0.57%, adding to the already robust year-to-date return of 10.56%. U.S. markets continue to benefit from a strong economic backdrop, historically robust earnings, and late-cycle fiscal stimulus.
In a widely anticipated move, the Federal Reserve (Fed) voted to raise the federal funds effective rate by 0.25% at its September meeting, pulling the short-term benchmark rate to a target range of 2.00-2.25%. The central bank reinforced its expectations for one additional hike in 2018, three in 2019, and one in 2020. The federal funds target rate has tightened financial conditions over the last year but remains below
the federal funds neutral rate, or the rate at which monetary policy is estimated to be neither conducive to nor restrictive of economic growth. For each of the last six recessions, monetary policy was restrictive (the federal funds target rate exceeded the neutral rate) for an average of 25 months prior to recession, suggesting that current conditions remain favorable for continued expansion.
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 improved in September versus August. The Business Conditions poll reading increased to 54.3 in September versus the prior 53.4. We note that progress on the trade front and continued strong economic performance may have positively affected corporate outlooks. The poll results continue to suggest that businesses remain optimistic regarding conditions in the next six- month period for large, publicly traded companies. Fundamentals for U.S. corporations remain sound, and economic data indicate solid manufacturing conditions. For example, we again saw a robust reading in the Institute for Supply ManagementTM (ISM) Manufacturing Index in September. At 59.8, this reading continues to indicate an acceleration of economic activity.
Question 2: When it comes to U.S. stock markets, would you say you feel bullish (optimistic) or bearish (pessimistic) right now?
The PNC-CS ISI Bullish/Bearish sentiment suggests that that more poll participants were bullish versus bearish about U.S. stock markets in September. After peaking in January at 59.6, just before the stock marketed corrected about 10%, the Bullish/ Bearish reading fell to a year-to-date low of 52 in April. Since then, the reading has consistently climbed, now pushing back toward the January highs. The September reading of 57.8 was a big increase from the August reading of 54.7. Given the current reading, even as the market has reached new all-time highs, investor sentiment is still somewhat less extended than it was earlier in the year. We would view that as a short-term positive for equity prices.
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 moved higher in September to 45, versus the August reading of 43.3 (Chart 2).
The PNC-CS ISI poll results for September suggests an increase in poll respondents’ optimism. In fact,
the September reading of 45 is the highest level we have seen in 2018. Investor Bullish versus Bearish sentiment increased, as did the poll-reading for Business Conditions. From a Personal Investment perspective, respondents were also more optimistic in terms of investing in stocks six months from now.
The next PNC-CivicScience ISI will be published in November.