Bracing for Impact: Investor Sentiment Drops as 2020 Comes to an End
The Canadian Investor Index (CII) showed a decline in retail investor sentiment over the month of December (-35). This breaks a streak of eight straight months of positive gains. The last time we witnessed a decline in retail investor sentiment was during the pandemic-induced market sell-off of March 2020 (-73).
Negative sentiment was largely seen within the long-term buy-and-hold investor group (-46). This group of investors is typically contrarian - buying when the equity market is down and selling when it is up. In December, equity markets in Canada and the U.S. were able to squeeze out modest gains despite several negative events dominating news headlines. Long-term investors decided to trade against this equity market advance, likely preferring to focus on the risk of an acceleration in COVID-19 infections and government-imposed restrictions.
Though long-term investors drove the overall sentiment index lower, the sentiment of active traders increased over the last month (+16). Historically, active trader sentiment follows equity market momentum - When markets are increasing, they increase risk. This time was no different. Given that equities looked past the near-term economic risks, so too did active retail investors.
Sector Shift: Consumer Defensive and Financials Lose Luster
The sectors that saw the greatest shifts in investor sentiment were Consumer Defensive (-37) and Financial Services (-18). Within the Consumer Defensive sector, investors soured on retail and grocery firms that are more leveraged to instore shopping. Given the increasing fear of infection and government restrictions, it is no surprise that firms with less of an online presence were paired back in investor portfolios.
For Financials, the decline in sentiment continued a negative trend over the last few months. Even though bank earnings have largely recovered from the pandemic impact, the low interest rate environment is thought to weigh on bank profit margins. Furthermore, the near-term economic weakness may result in rising unemployment and hamper the ability for consumers to meet debt payments. This could be an additional near-term headwind for bank earnings.
The Demographic Divide: With Age Comes Patience
The decline in sentiment was very apparent in the Generation Y/Z (-21) and X (-19) demographics. This younger demographic traded with a preference towards safety over the last month, whereas those in the Boomer (+4) and Traditional (Silent, +2) generations exhibited increased positive sentiment. Given the recent negative news flow, it is apparent that younger investors reacted more strongly to events than did older investors.
The Outlook for 2021 (Optional – For Discussion)
The upcoming year looks to be one of two halves. In the first half, high COVID-19 infection rates are likely to result in slower economic activity. Then, in the second half, vaccine deployment should dramatically reduce the spread of the virus and cause economic activity to bounce back strongly. According to the CII, the majority of Canadian investors have focused on the negative near-term economic prospects. Given the uncertainty the virus places on the economic and financial market outlook, this caution is understandable. But as the post-vaccine world comes into focus during the latter half of 2021, the subsequent economic recovery should bring improved confidence to investors. As equity markets are forward looking, current pricing implies that greater emphasis is being placed on the positive outlook for 2021 and beyond, rather than the near-term challenges that the virus imposes.
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