As strange as it may sound, if you watch enough news about the stock market, you will sometimes hear about “animal spirits”. This is not to be confused with the practice of introspective self-identification. My lightning-fast 11 year old daughter associates the cheetah as her spirit animal, but animal spirits are different. In 1936, John Maynard Keynes referred to animal spirits as a way to explain why humans make decisions toward the economy and the markets in light of, or in spite of, quantitative information. Animal spirits are important to acknowledge because investor fear or confidence in the economy can often have a greater impact on short term market moves than the real economic data has.
In April, the NASDAQ broke through the 6,000 mark while gaining over 2% for the month. The composite was helped mostly by its large technology exposure as that sector has led all sectors in April, the year 2017, and the last 12 months.1 The more broadly diverse S&P 500 composite was up 1% for the month. 2 The animal spirits have been strong for a long time, apparently fueled off the hope of change.
The charts above emphasize how 2017 has shown some peculiar things some associate with animal spirits. Stocks with high earnings growth rates and expensive P/E ratios have done better in 2017 than stocks with slow earnings growth or stocks that are cheaper. We also see this year that larger companies have done better than smaller companies and investing for dividends hasn’t paid off lately. This isn’t to say that there is cause for concern. Animal spirits really tell us that investors are optimistic about the things to come and, not so coincidentally, comes at a time when the Consumer Confidence index is near a 16 year high.3
Although, we may feel more comfortable with the markets moving at a more predictable tortoise pace, these rabbit leaps from one month to the next have been exciting. We will wait to see if there is substance behind these gains. GDP, corporate earnings, and unemployment need to remain positive. If not, the next animal spirit we may encounter may be a bear!
Have a great May as we finally leave the dreary weather behind us!
1 Eaton Vance Monthly Market Monitor
2 Thomson Financial