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Why terrible headlines and sentiment might be a positive indicator

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As you've surely noticed, the headlines have been bad recently...

And being the contrarian value investor that I am, that makes me... well, not exactly bullish on stocks, but more "constructive" than I was at the beginning of the year.

Here's a headline from the Wall Street Journal yesterday: U.S. Stocks Post Worst Quarter Since 2022 on Threat of Trade War. And here's an excerpt from that article:

Worries about tariffs and the economy sent the S&P 500 and Nasdaq Composite to their worst quarters since 2022, a setback that is pushing some investors overseas.

The Trump administration's whipsaw rollout of a tariff fight with America's biggest trading partners has analysts trimming forecasts for economic growth and lifting estimates for inflation. The tech trade that carried indexes to new highs is fizzling. Investors big and small have been shifting bets to Europe – where new spending plans could jolt a lethargic economy – and beyond.

In another WSJ article from yesterday, strategist James Mackintosh is writing about gold and says "I still like Treasurys, and would have more cash than usual": How to Prepare Your Portfolio for the Next Market Mess. Excerpt:

What happens if it all goes wrong? Investments designed to preserve your wealth in a stock-market downturn can help preserve your sanity too, allowing you to avoid dumping your favorite stocks as prices tumble.

But finding this market insurance has become harder, with Treasurys and perhaps even the dollar no longer offering the protection they used to. No wonder gold is up so much.

And as Charles Schwab's Chief Investment Strategist Liz Ann Sonders shows in these three charts from her posts on social platform X, consumers' expectations for the next year in three areas have plunged – their own incomes, unemployment, and business conditions:

So why am I not super bearish right now?

For one, take a look at the charts above and look at the last two times consumers' expectations were terrible: March 2020 and late 2022. Both of which were fabulous times to buy stocks.

In other words, negative sentiment is often a contra-indicator.

Also, as this recent WSJ article notes, what Americans feel and how they act can be quite different: Americans Feel Bad About the Economy. Whether They Act on It Is What Really Matters. Excerpt:

Hard data including sales, industrial production and jobs reports indicates that although the economy has softened, it probably isn't shrinking. That data can take time to catch up with the reality on the ground, however, and some measures, such as employment, often don't turn until the economy is already in trouble. So economists are paying close attention to soft data for clues on where the economy is headed.

Some consumers have said they are pulling back, and sales are starting to soften for airlines and convenience stores. Still, that may not be enough to dent the overall economy – in part because people don't always change their behavior based on how they are feeling.

The below post on X by Gavin Baker of Atreides Management is a good summary. He notes that sentiment is, if anything, worse among professional investors... but he correctly points out that almost all of the negativity stems from policies that President Donald Trump could ease in an instant:

My gut tells me that Trump doesn't want to begin his presidency by tipping an otherwise strong economy into a recession, so he'll declare some victories and back off a bit – which could trigger a huge relief rally.

To repeat what I said earlier... While I'm not outright bullish right now, I'm feeling more constructive than I was at the beginning of the year.

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.

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