U.S. Equity Market Sentiment: September Update Leaves Questions Unanswered
After the summer break, and with U.S. indexes continuing to reach new highs, we take a look at sentiment toward the U.S. equity market through three intermarket indicators.
Let’s start with the Gold-to-Dollar ratio. As we know, an upward trend in this ratio suggests lower confidence in the outlook for the U.S. economy. As can be seen, after a largely sideways phase, the indicator has started rising again since the second half of August. This renewed acceleration signals growing concerns about U.S. economic growth and expectations of an interest rate cut by the Fed.
The second indicator, however, appears more optimistic about the U.S. outlook. The ratio between big caps and small caps seems to indicate a trend reversal. At the moment, small caps are outperforming large caps—an element that may reflect stronger confidence in domestic demand and that also reinforces expectations for a significant rate cut by the Fed (as lower borrowing costs tend to favor smaller companies).
Finally, the third indicator compares the performance of the VIX and the MOVE, two indices that track volatility in equities and bonds, respectively. Looking at the short-term moving averages, a downward trend has been evident since late spring. Typically, a stronger MOVE relative to the VIX points to a low perception of equity risk and may suggest excessive confidence in the stock market.
In summary, the analysis of our three sentiment indicators for U.S. equities does not fully resolve investors’ uncertainty. The only clear element seems to be strong expectations of interest rate cuts, but the reliability of the equity rally remains less than fully confirmed.
