When it comes to the stock market, sentiment is usually something I’d associate with the noise of the market. In this context, sentiment is often the momentum of the share price movement driven by the investor emotions of fear and greed. When sentiment is against a company, it is often out of favour. Ignoring the noise of the crowd means it may potentially be a buying opportunity. Conversely, when sentiment is in favour of a stock or trend, this noise may well mean that it’s time to sell down or take profit. In this regard, sentiment reflects the weight of the herd's view in the short term. For long-term investors in shares, paying attention to sentiment can be counterproductive.
From an economic perspective though, sentiment really does matter. After all, the global economy is not a machine or some abstract concept, it’s just the output of what all the people in the world do. The global economy is simply the result of what we collectively produce and consume as individuals every day. This is an important and often forgotten aspect of how we look at the world from an investment perspective. If consumers and business owners are positive about where the economy is going, they are more likely to spend and invest. While if they are negative about the economic situation then they’ll spend and invest less. So, it becomes a self-fulfilling cycle. Consumer and business sentiment matter a great deal to economic activity.
Central banks and governments understand that sentiment matters from an economic perspective. It’s why they are so focused on managing consumer and business expectations. In tough times, they will never say “this situation looks like it could be an economic disaster”. Even in a recession they will say something like “it’s been a tough few months, but we think the worst is behind us, the green shoots of growth are coming through”. Then they will repeat that every month until it ends up being right. That approach is also the right way to manage sentiment in the down times from a government managing the macro-economic perspective. If you talk down the economy, you’ll shift sentiment down fast, then the economy will fall off a cliff too quickly.
It's rare and in fact counterproductive for governments and central banks to speak openly about any real concerns for the economy as it will only make them worse. It's far better to speak positively to blunt the impact in tough times and eventually, the good times will return. That’s the playbook for governments around the world. The mistake investors make after listening to it is to believe it. It's up to an investor to decide for themselves what their view of the macroeconomic picture is. Your mandate is to generate a return from your investments and that is completely different from the aim of the government and the central banks. The worst time to listen to the government for economic guidance is when the economy slows because that is exactly when your goals clash with theirs.
So, as the global economy begins to slow over the coming months remember all of this. It’s up to you as an investor to form your own view of the economy and what that means for consumers and businesses. Understanding the impact that sentiment has on a slowdown in the global economy is critical for investors because ultimately the activity of consumers and businesses flows through directly to the profits of companies you invest in. But don't be fooled into thinking that the government or central banks will tell you how an economic slowdown will play out. Their task is different to yours.
General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions