Felipe Mejia
Analyst
Equity markets have had quite a run in the past year, with the S&P 500 up 89% and the Russell 2000 small cap index up 125%. This strong rally has been driven primarily by the reopening of the economy, which already may be mostly priced in. Fundamentals remain strong, Federal Reserve policy remains easy and the federal government continues to pass spending packages in the trillions of dollars; however, we see signs of things starting to cool off. The ISM Manufacturing Survey came in at 60.7, below the estimate of 65 and last month’s reading of 64.7 (Figure 1). Although any number above 50 signals expansion, after PMI’s peak, it usually leads to little movement in markets with an average six month forward return of -1% going back to 1973. Sentiment, although not as useful for timing tops as it is for timing bottoms, is still at an elevated level. Our Voya Sentiment index is currently reading a level at the 97th percentile going back to 2001 and the 99th percentile going back to 2015. Even though it may sound bearish, I do not feel negative about equity markets. I do, however, believe that the chances of seeing sizeable returns like we did in the past year are slim to none.
Source: Bloomberg, data as of April 30, 2021
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