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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 information is for informational purposes only, not to be construed as investment advice or a recommendation or offer to buy or sell any security. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund. Any views expressed herein are those of the author(s), are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. There are no guarantees regarding the achievement of investment objectives, target returns, portfolio construction, allocations or measurements such as alpha, tracking error, stock weightings and other information ratios. The views and strategies described may not be suitable for all investors. SSGA does not provide tax or legal advice. Prospective investors should consult with a tax or legal advisor before making any investment decision. Investing entails risks and there can be no assurance that SSGA will achieve profits or avoid incurring losses.
Performance quoted represents past performance, which is no guarantee 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.
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