The PNC-CivicScience Investor Sentiment Index (PNC-CS ISI) ticked lower for the second straight month in November. Investor optimism, as measured by the poll, is only slightly above the 2018 low reached in April, and has been trending lower since making a year-to-date peak in September.
The November 2018 results reflect renewed concerns regarding the market and the economy, combined persistent uncertainty surrounding global trade, Brexit, the Chinese economy, and falling oil prices. These concerns have been reflected in financial markets.
In mid-November, the S&P 500® fell into correction territory (defined as being down 10% or more from a prior peak) for the second time this year. Not having experienced a correction since 2015, the market appears to be moving out of its multiyear volatility lull. With more than half of the S&P 500® constituents trading below their respective 200-day moving averages, the damage done during this correction has been far greater than what was experienced earlier in the year. During the January/February correction, approximately two-thirds of the S&P 500® stocks remained above their 200-day moving averages, giving the market far more support in its recovery.
Third-quarter earnings season is nearly complete. The S&P 500® saw a growth rate of nearly 26%. This marks the fourth consecutive quarter of accelerating earnings growth, and every sector generated positive results. Under the new Global Industry Classification Standard format, the Communication Services sector was a significant contributor to both earnings and revenue growth; however, the revenue upside surprise was among the lowest of any sector. Highlighting the recent challenges in internet-based stock prices, third-quarter earnings marked the first time Alphabet Inc. (GOOG), Amazon.com, Inc. (AMZN), and Facebook, Inc. (FB) all missed sales estimates in the same quarter since Facebook went public in 2012.
After meetings between the United States and China at the G-20 summit, the United States will refrain from raising tariffs from 10% to 25% on January 1, 2019. Instead, the United States will place a 90-day extension on current policy as the two countries can focus discussions on specific topics such as intellectual property, and China agreed to boost its purchases of agricultural goods from the United States. Third-quarter earnings season highlighted the impact of higher input costs towards operating margins, and we believe the market is underpricing the probability of ongoing positive progress toward a trade deal.
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 fell significantly in November. The Business Conditions poll reading decreased to 51.6 in November versus the prior 54.7. This represents the second largest drop and lowest absolute reading of 2018. We note that financial market volatility, trade uncertainty, and other variables likely weighed on sentiment.
However, fundamentals for U.S. corporations remain sound, with the economic expansion expected to continue through 2019.
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 less bullish about the U.S. stock market in November. 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 in April of 52. Since then, the reading had consistently climbed, reaching a level of 57.8 in September. As is often the case, high bullish readings can be a contra-indicator for the stock market. As in January, this again proved to be the case. In October, the reading fell to 55.4 as stock volatility picked up. As volatility has persisted, the reading has fallen further to 54.3.
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 lower in November to 42.9, versus the October reading of 43.6 (Chart 2). This level is consistent with readings we have seen from this component of the survey since its inception in 2017.
The PNC-CS ISI poll results for November suggests a decrease in poll respondents’ optimism, now only slightly above the lows seen earlier in the year. Investor Bullish versus Bearish sentiment decreased, as did the poll-reading for Personal Investment. From a Business Conditions perspective, respondents seemed meaningfully more pessimistic.