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Legendary investor Sir John Templeton famously said bull markets—extended periods of generally rising equity prices—are “born on pessimism, grow on scepticism, mature on optimism and die on euphoria.”

Templeton was referring to sentiment—the broad mood surrounding equities—and how it evolves throughout a bull market. Many financial commentators followed by Fisher Investments Canada regularly reference it when discussing how much longer equities’ climb might last.

How does one gauge sentiment? No single method is perfect, but we think examining a variety of quantitative and qualitative factors can provide a general sense of investors’ collective mood, offering key clues about where you are in the equity market cycle.

For all the financial data available today, sentiment is not easily distilled into numbers. We think it’s because feelings are, by their very nature, not objective. Consider the investor surveys we frequently see cited by financial publications. One of research firm Sentix’s weekly eurozone indicators asks investors what they think about equity market direction over the next month and six months, but it does not consider that direction’s magnitude.[i]

Someone expecting equities to rise slightly is considered just as optimistic as an investor who expects huge returns. In our view, such surveys can offer a general sense of broad trends over time, but they don’t fully capture sentiment—and they shouldn’t drive investment decisions on their own.

Fisher Investments Canada considers several other factors in developing a high-level view of the market’s mood. For example, we continuously gauge the tenor of major news stories across a variety of financial publications around the world. Are they emphasising negative developments? Or are they couching seemingly good news as fleeting or problematic because it might trigger something else—for example, fretting improving unemployment because it could inspire central banks to tighten monetary policy?

Such tactics hint at a sceptical mood. In contrast, if financial news coverage broadly emphasizes positive developments and bright economic outlooks, sentiment may be growing more optimistic. If headlines explain away all negative developments and highlight far-flung positives, that may imply an environment in which investors could be overlooking risks—a potential sign of euphoria. We think this can be doubly true if commentators shrug off analysts highlighting negative factors, or if they hype people taking on excess risk to reap huge short-term returns.

Friends, relatives and colleagues can also be a good, albeit unscientific, resource for analyzing general sentiment. Are people you know touting new can’t-miss opportunities? Are they scared of equities? Or something in between? In our experience, the more optimism you find from these sources, the later you likely are in a bull market’s lifespan.

Additionally, Fisher Investments Canada’s research has found that several quantitative indicators can offer further clues about investors’ collective mood. Among them: the number of initial public offerings (IPOs), or share sales of formerly private firms newly listed on public exchanges. When demand for shares in particular industries peaks, more private companies tend to go public to take advantage of rising sentiment—and prices—according to our research. We think big returns on an IPO’s first day can be a sign of euphoric sentiment—an indication overly optimistic investors have far-flung hopes of getting in early on shares of the next big thing.

However, it isn’t just broad IPO volume or returns that matter—quality is critical. We have found the higher sentiment rises, the more willing investors are to take fliers on unproven firms debuting in hot industries. When companies generating little to no earnings start netting big IPO windfalls, we see it as another sign euphoria may be emerging.

Margin debt—money investors borrow from a broker to purchase equities—also tends to rise alongside sentiment, according to our research. When pessimism is high, we think relatively few investors see benefit in putting borrowed money at risk in the market. But when spirits improve, in our view, many dream of big gains that will more than pay for their debt service. So we consider the rate of change in margin debt—not necessarily the overall level—to be a useful sentiment indicator.

Finally, we also monitor equity fund flows. These show the net amount of money that investors add to or pull from equity funds (including managed funds, index-tracker funds and exchange-traded funds) in a given period. When inflows greatly exceed outflows, it can indicate rising sentiment. Conversely, when outflows far outpace inflows, moods may be sinking.

But fund flow information has its limits, in Fisher Investments Canada’s view. One example: Fund flows don’t show you what happens to money investors pull from equity funds. If an investor redeploys some of that cash into individual firms’ shares, it is still considered an outflow from the equity funds, even though the money hasn’t left equities. We think this is one of many reasons investors should use multiple metrics to gauge sentiment.

While reopening optimism stoked investor spirits early in 2021, jitters over COVID-19 variants and renewed lockdowns in Europe and the UK have left the mood there largely lagging U.S. sentiment, in Fisher Investments Canada’s view. We think this highlights the importance of investing globally—and monitoring sentiment worldwide.

Consider: America accounts for about 67% of developed-world market capitalization.[ii] For globally minded, non-U.S. investors, we think America’s sentiment trends can matter as much or more than those in their home countries.

Gauging equity market sentiment can be tricky. But we think understanding how to do so—and how to respond to sentiment shifts—can help you maintain discipline, a crucial ingredient for long-term investing success.


Fisher Asset Management, LLC does business under this name in Ontario and Newfoundland & Labrador. In all other provinces, Fisher Asset Management, LLC does business as Fisher Investments Canada and as Fisher Investments.

Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments Canada and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments Canada will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.


[i] Source: Sentix, as of 14/07/2021.

[ii] Source: MSCI, as of 13/07/2021. Statement based on MSCI World Index country breakdown.


This content was produced by Fisher Investments Canada. The Globe and Mail was not involved in its creation.

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