S&P/ASX 200 Index (ASX: XJO) shares haven't had the best of years so far.
On the back of fast-rising inflation and the resulting steep interest rate hikes, the ASX 200 is currently down 4% in 2022.
That's after the benchmark index posted a very impressive 13% gain in 2021.
So, will 2023 see the ASX return to positive momentum, or can investors expect another tough slog ahead?
While there are many, many pieces to that puzzle, part of the answer might be found in the current level of rather bearish investor sentiment.
Why bearish investor sentiment may be good news for the ASX 200
Investor sentiment, as you'd expect, tends to ramp up (like a bull) when markets are running higher and turn bearish when markets are losing ground.
While the ASX 200 is down 4% this year, markets in the United States have fared far worse.
As of last night's close, the S&P 500 Index (SP: .INX) is down 18% year to date. There is a range of factors why the S&P 500 has fallen more than four times as hard as the ASX 200. Part of that sits with the relative performance of the two indexes the prior year.
US equities broadly exploded in 2021, which saw the S&P 500 finish the year up 27%, more than double the gains posted by the ASX 200. Meaning it had a good bit more ground to yield this year.
With that said, you can see why US investor sentiment remains in the doldrums.
According to eToro's proprietary composite sentiment indicator, 42% of US retail investors are still bearish, despite the market's strong performance in November.
The eToro sentiment indicator is made up of:
- Equity mutual fund and ETF flows
- The long-running American Association of Individual Investors sentiment survey
- VIX index of expected S&P 500 volatility
- S&P 500 put/call ratio, measuring the proportion of put buying (option to sell in future) versus calls (to buy in future)
Of these, only the VIX indicates less bearish investor sentiment. But that appears to be the exception.
"The rebounded VIX captures attention, but it's the outlier, with other sentiment indicators remaining very low," said Ben Laidler, global markets strategist at eToro.
Laidler continued:
Bad investor sentiment has been a contrarian help to the recent rally and it remains a key support. If everyone is bearish, there are few left to sell, and many could buy. It means a little 'less-bad' news goes a long way.
Sentiment is off its lows but still depressed and it's only been this low a handful of times.
Now, we're talking about US stock markets here.
But looking back at the charts, time and again, when US stock markets rebound, the ASX 200 historically enjoys a healthy boost as well.
Meaning 2023 may just surprise to the upside.
