The stock market moves in response to economic and corporate conditions and also on sentiment - how people feel about economic and corporate conditions, regardless of how conditions really are. James Paulsen, chief investment strategist at Wells Capital Management, part of Wells Fargo (WFC), has put together some nifty analysis showing the extent to which each factor guides investors’ actions at which times. When do they focus on fundamentals and think with their collective head, when do they let their emotions dictate proceedings and, most important, what are the implications for the stock market?
Paulsen’s starting point is an obscure measure called the Bloomberg U.S. Financial Conditions Index. Essentially, it measures “the financial markets’ assessment of the probability of a crisis,” he explains in a report to Wells clients.
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