Tools for your investment toolbox

Investors are all aware of valuation metrics and what one metric might mean for a particular stock or, collectively, for the marketplace as a whole. Less talked about are investor and advisor sentiment and confidence. Investors gain much insight by reviewing such indicators and using them as another tool within their investment toolbox.

Quarterly investment advisors pontificate on where various market metrics will be in the future. While it would be virtually impossible to read every investment advisor's newsletter, the Investors' Sentiment Index aims to provide a snapshot of what advisors are thinking. Created in the 1950s, this well-known contrarian indicator in the investment community is also known as the Advisors' Sentiment Report. When consensus opinion tend to be the strongest, followers of this particular index tend to believe that the trend will reverse.

The Investor's Intelligence Index most often registers a neutral position. However, it can also fall into being slightly bullish or slightly bearish. What sets it apart from other indices is its historical ability to gain or lose extra index points as the percentage of bulls or bears increases. Because of this feature, trends become more predominate over time - although reversals and movements toward the contrarian direction can take quite a while to become realized and acted upon by market participants.

Like the investor's Intelligence Index, consumer sentiment indicators can also be a useful tool when making investment decisions. These indicators exist for general market conditions as well as individual securities and the economic cycles we may be entering. Consumer sentiment will show optimism or pessimism regarding the general consumer's attitude. Businesses then determine their appropriate levels of inventory build by analyzing its perception and data regarding the general public's willingness to purchase in the future. Public economic policy will also have an influence on the Fed to raise or lower interest rates forecasting future economic growth. With respect to consumer sentiment, the primary indicator that is followed is the Michigan Consumer Sentiment Index.

This index is useful to determine consumer attitudes toward spending and the national economy. It has been also helpful when the consumer is hesitant going forward unwilling to extend their credit obligations. This index is calculated monthly by compiling information from 500 phone interviews with 50 questions nationwide.

A third useful tool for gauging confidence in the marketplace is The Consumer Confidence Index, which is compiled by the Conference Board on a monthly basis. It measures the consumer's financial health and perception with purchasing in the future. The survey is broader based than the Michigan Index; there are 5,000 individuals surveyed, who respond to five questions. A score is given to the data with 40% weighted toward current conditions and 60% toward future economic outlook. The index uses a base number of 100.

Most recently the number has been deteriorating to 94.4 from a December reading of 95.9. Historically, the consumer will respond to current situations, thereby formulating their response to questions by their individual circumstances. The creation of jobs and tax breaks will often skew the results in a more favorable way.

Sentiment among professionals and consumers is a vital measurement tool that may help you in your investment decision when allocating to asset classes going forward. They should never be taken singularly, but used with a plethora of other necessary data to make an informed decision.

Most recently we have experienced volatility in the equity markets. The VIX (Chicago Board Options Exchange Volatility Index) has remained dormant since the beginning of 2017 and actually hitting all-time lows during the last two months. This index, often referred to as the fear index, has expressed complacency regarding a downturn in equities values. The recent violent move upward in this index was reflective of the brewing concern that higher interest rates, potential inflation and extended valuations were present. Volatility can be erroneously perceived as dangerous; however, if basic strong fundamentals exist, it can present opportunities to purchase certain equities at bargain prices.

Market gyrations are always part of the landscape. You should have a portfolio with diversity among different asset classes, strong fundamentals and a value horizon beyond a few days or weeks. Stay the course and over time you should be well rewarded with decent returns.


Mitchell Thomas is an International Equity Analyst/Portfolio Mgr./Head Trader for Karpus Investment Management, an independent, registered investment advisor that manages assets for individuals, corporations and trustees. Offices are located at 183 Sully's Trail, Pittsford, NY 14534, (585) 586-4680.

Published: Mon, Mar 05, 2018