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market sentiment

Y

yogesh167

Member
Hello

Hope you are doing well.

1. Pg14 of Ch7 says that 'when market sentiment is low, one would expect high returns on small stocks, highly volatile stocks. etc..'
According to my understanding, value stocks are less volatile and preferable when market sentiment is low. So I think this statement in the course material contradicts this theory? Could you please confirm..

The same page also mentions that when market sentiment is low, one would expect high returns on stocks of unprofitable companies. I am not sure how can unprofitable companies provide high returns during any market sentiment?

2. Pg 16 of ch17 last paragraph - 'small stocks tend to outperform in recovery situations when sentiment has been low (and prices are distressed) and then subsequently recovers. Whereas value stocks with low PE ratios tend to outperform when sentiment is low and falling.'

Small stocks are value stocks, right?
Why 'whereas' is mentioned, it seems both the lines in the above para are referring to when sentiment is low and going in the same direction..
 
yogesh167 said:
Hello

Hope you are doing well.

1. Pg14 of Ch7 says that 'when market sentiment is low, one would expect high returns on small stocks, highly volatile stocks. etc..'
According to my understanding, value stocks are less volatile and preferable when market sentiment is low. So I think this statement in the course material contradicts this theory? Could you please confirm..

The same page also mentions that when market sentiment is low, one would expect high returns on stocks of unprofitable companies. I am not sure how can unprofitable companies provide high returns during any market sentiment?

2. Pg 16 of ch17 last paragraph - 'small stocks tend to outperform in recovery situations when sentiment has been low (and prices are distressed) and then subsequently recovers. Whereas value stocks with low PE ratios tend to outperform when sentiment is low and falling.'

Small stocks are value stocks, right?
Why 'whereas' is mentioned, it seems both the lines in the above para are referring to when sentiment is low and going in the same direction..
Click to expand...

Hi Yogesh

I don't believe small stocks are the same as value stocks. As you say, small stocks are mentioned on p14 of Chapter 7. The Core Reading is vague here, but looking at the underlying research papers in this areas, it appears that a number use or reference a methodology specified by Fama and French to identify small stocks. In contrast, the Core Reading specifies the characteristics of value stocks on page 4 of Chapter 21.

I hope that helps

Gresham
 
Thanks Gresham

Pg14 of Ch7 says that 'when market sentiment is low, one would expect high returns on small stocks, highly volatile stocks. etc..'

Could you please confirm if there should be a correction in the sentence above - when market sentiment is high instead of low?

Thanks
 
Hi Yogesh, I haven't looked at the underlying research, but I think that Core Reading statement could well be correct. If sentiment is low, investors have been gloomy and pessimistic, therefore the value of small stocks, highly volatile stocks etc may be irrationally low. This may lead these stocks to have high returns in the future
 
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