Why Vibes-Based Investing Doesn’t Work

According to this Spring’s Westpac-Melbourne Institute Consumer Sentiment Index readings, moods Down Under are rather low. Many see that as a warning sign for the economy and stocks. But according to Fisher Investments’ reviews of the historical record, sentiment measures reveal little about markets’ future path.

As Exhibit 1 shows, consumer sentiment doesn’t align consistently with market cycles. If anything, Fisher Investments’ reviews reveal low readings more often fall around the ends of bear markets (fundamentally driven declines exceeding -20%). Bear markets usually end with stocks bouncing in a sharp, V-shaped manner. So, if you relied on sentiment measures, it could be costly. For example, the early 1980s’ long bear market ended in July 1982, but sentiment kept falling until November 1982. In those five months the ASX All Ordinaries rose 9.3%.[i] Relying on sentiment’s improvement before re-entering the market would mean missing those gains.

Exhibit 1: Consumer Sentiment Doesn’t Predict Market Cycles

Or take the sentiment index’s falling to troughs in 1986, 1998, 2006, 2010 or 2014: All occurred during bull markets which went to new heights. They aren’t the only examples. Sentiment fell from April 2021’s 119 peak to November 2022’s 78 trough. A shallow global bear market did occur from January 2022 to June 2022, as did a deep correction in Australian stocks. Yet over the entire sentiment downturn, Australian stocks rose 2.6%.[ii] From there, stocks jumped another 19.9% through September 2026’s end despite sentiment turning down again in the meantime.[iii] Fisher Investments’ reviews of other such sentiment indicators worldwide show similar: Relative peaks and troughs don’t match market cycles.

We think it is important for investors to understand why. It seems counterintuitive. Given consumer spending’s large economic footprint, if most folks feel lousy—say from escalating living costs and rate hikes, like this Spring—then you could reasonably expect the economy to be, too. And if the economy isn’t doing so hot, businesses probably may be struggling, weighing on markets.

But consumers and investors don’t actually behave like that. Spending rarely follows sentiment. Why? Based on Fisher Investments’ reviews of historical data, consumer spending dominates GDP, but it is mostly non-discretionary. Elevated energy prices may bite, crimping discretionary spending, but that usually just means more goes to staples, like fuel for driving to work—to pay the bills. Though it may not be what everyone wants to spend on, it is still spending that grows the economy—and earnings—which markets recognise. People may understandably feel worse-off, but that seldom spells economic doom.

How is this helpful for investors? Sentiment swings can go any which way for any or no reason. There is no telling when or where: Bright moods can always get brighter—and glum ones glummer. Fisher Investments’ reviews of history show you can’t rely on sentiment alone as a market guide. The key: Stocks look forward. Stocks continually assess whether earnings 3 to 30 months ahead are likely to miss, meet or beat expectations. And as sentiment affects prevailing attitudes, it also shapes expectations.

When Fisher Investments reviews market cycles, what matters is how earnings results square with that outlook. Stocks’ direction depends on the gap between sentiment and reality. We find investors are best served staying laser-focused on whether present expectations will be justified over the next 10 quarters. So, watch sentiment, but don’t let it guide you by itself.