A year ago, the blog launched its IeC Boom/Gloom Index. This was based on the concept that markets are driven by both sentiment and fundamentals. And whilst fundamentals can be understood by analysing hard data (eg auto sales, housing starts), it is equally important to understand sentiment, and what markets think will happen next.
Analysing the Index’s performance (blue column) over the past year, it seems to have done its job. It has certainly reflected the positive sentiment that propelled most financial markets into major rallies. Equally, its inability to regain pre-Crisis levels since October 2008, indicates that some investors remain more doubtful.
It has also tracked mood swings. A year ago, many in financial markets were focused on signs of the ‘green shoots’ of recovery, and were expecting government stimulus programmes to create a quick V-shaped recovery to the levels seen in the 2003-7 Boom period.
The ‘green shoots’ measure (green line) captured this mood. Since then, worries that we might face a more ‘frugal’ world have surfaced, and these have now led to a fear that we may be moving to a world of ‘austerity’. The blog’s dictionary defines this as “severe simplicity, lack of luxury”.
Austerity has therefore being added to the chart (red line), replacing frugal. This sentiment increased dramatically during May, as sovereign debt problems grew in Southern Europe. It will be interesting to see whether it proves to be just a temporary concern, or longer-lasting.