In an attempt to aggregate multiple sentiment indicators, The Pragmatic Capitalist (TPC) has created its own sentiment index called the “The Wall of Worry”.
It’s more specifically an inverse of most sentiment indicators in that negative sentiment, ‘worry’, is indicated by a high reading.
In an effort to visualise the “wall of worry” I’ve taken several of my most reliable sentiment indicators and taken the inverse summation of all. The result follows and displays the height (or lack thereof) of the “wall”. The results are fairly straight forward and interesting. You can see that the “wall” peaked in 1991, 2003 and 2009. The previous two peaks were prior to multi-year bull markets. Interestingly, the latest reading of 88.4 is not far from the March 2009 high of 93.5. Strictly using this long-term sentiment indicator it would be safe to say that the “wall of worry” remains quite high.
Obviously it would be nice to know what exactly went into the creation of this measure, but assuming TPC used reasonably reputable sentiment measures and checked to make sure that no one outlier indicator skewed the result, it’s interesting how negative sentiment remains very high vs. historical levels say from 2004 – 2008. The indicator doesn’t look too crazy based on a quick check of the S&P 500 (where pricing is a measure of sentiment), given that the S&P 500’s index value remains below the levels of 2005 – 2008.
As TPC says, the wall of worry remains very high for stocks to climb and if concerns can be overcome with actual data and earnings then the market could have a long way to rally. This again, isn’t too far fetched given that the S&P 500 was over 1,500 not too long ago while many of its constituents still have a bright future.
Problem is, when worries are valid then market sentiment can’t climb over them. Thus the take-away isn’t that stocks are about too explode higher but that it’s hard to say the market has become exceptionally optimistic. There are still a lot of problems and investors are still very worried.
Sure, investors are coming back to stocks, but at price and sentiment levels substantially lower than even just a few years back. Your optimism isn’t just measured by your action of buying stocks, but by the price you buy them at as well.
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