Making Sense of the Extreme Relationship Between Value and Sentiment
Correlation between value and sentiment has reached its lowest point since the dot-com bubble.
When extremes like this occur, it’s important for investors to be wary.
There’s a lot of disagreement in the market right now about what is cheap, and what has positive market sentiment. These themes represent important complementary characteristics that we look for when building equity portfolios. When there’s a lot of disagreement between these themes, the pool of companies that are attractive in aggregate becomes smaller.
This disagreement can be expressed as cross-sectional correlation (i.e., the degree of alignment)between the two themes. On average, this relationship has a correlation of around -0.1, and since 1998 we have observed a range of -0.2 to 0 in most periods.1 Right now, the correlation is -0.4. The only time in the past that we’ve observed such low correlation between value and sentiment was during the dot-com bubble.
This website is intended for persons resident in Australia. State Street Global Advisors, Australia Services Limited ABN 16 108 671 441, AFSL Number 274900 ("SSGA, ASL") is the product issuer. State Street Global Advisors, Australia, Limited (AFSL Number 238276, ABN 42 003 914 225) (“SSGA Australia”) is the Investment Manager. The material on this website is general information only and does not take into account your individual objectives, financial situation or needs. You should read and consider the Product Disclosure Statement (PDS) for the relevant product carefully before making an investment decision and consult your financial adviser. You can access our PDS online or by calling us. The offer made in our PDS is available to persons receiving the PDS within Australia and applications from outside Australia will not be accepted. Past performance is not a reliable indicator of future performance. Investing entails risks and there can be no assurance that State Street Global Advisors will achieve profits or avoid incurring losses.
Investing involves risk including the risk of loss of principal. This material should not be considered a solicitation to apply for interests in the Funds and investors should obtain independent financial and other professional advice before making investment decisions. There is no representation or warranty as to the currency or accuracy of, nor liability for, decisions based on such information. Performance quoted represents past performance, which is not a reliable indicator of future results. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted.
Images of NYSE Group, Inc. are used with permission of NYSE Group, Inc. Neither NYSE Group, Inc. nor its affiliated companies sponsor, approve of or endorse the contents of this program. Neither NYSE Group, Inc. nor its affiliated companies recommend or make any representation as to possible benefits from any securities or investments.