Sentiment is a key driver of stock market returns in the short-term, notes RBC Capital's Myles Zyblock. Fundamentals are more relevant for longer-term oriented investors. From his U.S. Equity Strategy Weekly note to clients:
Sentiment and value are cornerstones of the return generation process. We find that shifts in sentiment are critical on short-term investment horizons. For example, our work shows that changes in perception account for about two-thirds of the market’s return on a six-month horizon, and that even under the conditions of attractive value, bearish sentiment can drive prices lower and vice versa. Mean reversion is key to correctly using most sentiment gauges, where one attempts to arbitrage the belief that a recent trend will persist. Meanwhile, the market’s fundamental underpinnings become more important for investors with horizons that extend beyond a two-year time frame.
