Investors haven’t become super pessimistic on stocks since the recent volatility bout began. That could be a bad thing. “Short-term sentiment is showing more pessimism, but more intermediate-term sentiment is still showing optimism,” wrote Ned Davis Research analyst London Stockton. “During this seasonally weak period of the year and with election uncertainty, more pessimism could indicate a potential bottom.” Specifically, the firm’s Crowd Sentiment Poll — a gauge for intermediate market sentiment — shows excessive optimism among investors after dipping to neutral last month. NDR’s nearer-term daily trading composite, meanwhile, points to more neutral sentiment. History shows this sentiment mix often leads to lackluster market gains. When one indicator points to optimism and the other is neutral, the S & P 500 has averaged an annual gain of just 1.1% going back to 1995, NDR data shows. When both gauges are neutral, that gain swells up to 8.8%. This sentiment backdrop is reflective of where the stock market is today. On one hand, investors are hopeful the Federal Reserve will cut rates, giving a boost to equities . On another, concerns over an economic slowdown persist amid disappointing U.S. employment data. Wall Street is also anxiously looking ahead to the U.S. presidential election in November. So bottom line: It may take another bout of selling to shake out the weak bullish investors and restart the long-term trend. Elsewhere on Wall Street this morning, Goldman Sachs downgrades shares of Morgan Stanley to neutral from buy. “MS has a best-in-class investment bank, which has taken notable share over the past decade, and a leading wealth management platform, both of which have contributed to strong return improvement. However, as we move further into the investment banking cycle, we see other names as more likely to benefit,” analyst Richard Ramsden said. “We also see 3% downside risk to MS’ 2025E wealth [net interest income] and 40bps of wealth margin downside vs. the Street, largely driven by continued, albeit slowing cash sorting and pressure on asset yields when rates come down,” he added.
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