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Morning stock market summary

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The first three days of Q3 have been an example of stocks not picking up right where they left off in the second quarter. while things started off quiet enough during the shortened session on Monday, yesterday’s session and this morning’s pre-market have traded heavily.  This morning the tone has been especially weak as European stocks trade down over 1% on breadth that is skewed 10-1 to the downside.  There hasn’t been much data to steer the market, but rising interest rates have been acting as a significant weight.

This morning, there’s much more economic data to contend with. ADP Private Payrolls were just released and came in much higher than expected at 497K versus forecasts for a reading of 220K.  Jobless claims were more mixed.  Initial Claims came in slightly higher than expected at 248K versus forecasts for 245K and up from a downwardly revised reading of 236K. Continuing Claims managed to come in weaker than expected (1.72 mln vs 1.737 mln).  Overall, these reports suggest that any doubts over the health of the labor market can be put to rest, at least for now.  Besides these two reports, we’ll get the monthly JOLTS report at 10 AM followed by Non-Farm Payrolls tomorrow.  While there’s a lot of employment-related data to contend with don’t forget about the 10 AM release of ISM Services.

With the S&P 500 rallying into bull market territory and new 52-week highs, investors have become bullish.  According to the weekly survey of individual investor sentiment from AAII, bullish sentiment jumped up to 46.4% from 41.9%.  While bulls are still not in the majority and haven’t been in over two years, this week’s reading was the highest level of bullish sentiment since November 2021. Looking at the chart below, sentiment and the stock market have carved out identical patterns over the last two years indicating that investors’ views of the stock market have been based on how stocks have performed in the moment.

You may think that investor sentiment has always been positively correlated to the stock market’s performance, but that hasn’t necessarily been the case.  The chart below shows the rolling two-year correlation between AAII bullish sentiment and the S&P 500 since 2000.  While the correlation between the two has usually been positive, the levels have varied widely.  In fact, levels like the current reading of +0.50 or more have been uncommon occurring less than 12% of the time since 2000.

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