Irrational Behavior and Sentiment: Could the Markets be Wrong about Inflation?

At LPL Research, we spend much of our time analyzing global market fundamentals and market technicals, but we also are very aware of sentiment influences that come into play in certain market environments.  In this latest edition of LPL Street View, LPL Financial Director of Research Marc Zabicki discusses a sentiment issue about capital markets.

Markets can be highly irrational in the short-term and sentiment can swing dramatically as a result.   Now may be one of those times when market participants are displaying irrational behavior and sentiment is weak as a result.

We believe we are currently in a market that is pricing in a lot of bad news.  Market participants are digesting troublesome inflation and reacting to the Federal Reserve’s (Fed) more hawkish policy tone.  Moreover, equity markets historically don’t do well in the month of September, and September 2022 has been filled with negative sentiment and poor market returns

The way markets are reacting would many to think inflation is not going to dissipate and the Fed is not going to stop raising rates.  In short, we believe the markets have got these points wrong.

We believe inflation has already begun to dissipate, and we expect inflation to continue to fall further in the months ahead.  In our view, this will take some pressure off the Fed, and that could take some pressure off risk-based asset prices.

In a time of peaking pessimism and some irrational fear in the marketplace, now it not the time to abandon your investment approach.  We have seen volatile periods like this many times before. As a matter of fact, in looking at some key sentiment gauges we track, the market has not seen this much pessimism in the last 10 to 12 years. Those kind of conditions present opportunity and have historically been the wrong time to fold up your tent.

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• What’s Supporting This Market Rebound? – August 17, 2022