Updated March 7, 2025
Investor, Consumer, and Business Sentiment: The Pulse of Markets and Economies & Macro Implications
Investor, Consumer, and Business Sentiment: The Pulse of Markets and Economies & Macro Implications
Investor, Consumer, and Business Sentiment: The Pulse of Markets and Economies & Macro Implications
AJ Giannone, CFA
The Macroscope
Investor, Consumer, and Business Sentiment: The Pulse of Markets and Economies & Macro Implications
Sentiment measures are widely quoted in today’s financial media, but framing them in light of proper macro investing principles is key
Vibes are often contrarian signals, but there’s nuance that must be considered
Using Ray Dalio’s framework, we can effectively manage risk with the help of sentiment barometers
Politics has seeped into so many facets of financial markets. It used to be that the economy was, of course, a primary issue on campaign trails, but investors’ collective feelings on the state of household finances and where the stock market was headed were largely separated from which party was in the White House. That has all changed—look no further than investor and consumer sentiment polls.
Over time (primarily after the 2008 Great Financial Crisis (GFC)), people began linking their political views to mainstream issues. That trend made traditional gauges of market and macro sentiment less useful. Former President Obama’s controversial Affordable Care Act (ACA), President Trump’s 2017 Tax Cuts and Jobs Act (TCJA), former President Biden’s slew of stimulus measures, including poorly named Inflation Reduction Act (IRA), and Trump 2.0’s aggressive tariff rhetoric all play a role in American’s seemingly being permanently divided when it comes to economic vibes.
Let’s dive into the various investor and consumer sentiment measurements, what they are, when they can be useful, and how they should be framed within Ray Dalio’s macro investing principles.
What Are Sentiment Gauges?
The Consumer Confidence Index, University of Michigan Consumer Sentiment, AAII Investor Survey, CBOE Volatility Index, and CFTC Commitment of Traders report are, among others, the widely reported sentiment indicators. They assess the market participants’ collective mood, including small and large investors, consumers, households, small businesses, and managers in the services and manufacturing sectors.
They are also considered “contrarian” indicators, meaning when there’s extreme sentiment, the wise play is to take the other side—if everyone is bearish, you should be bullish (and vice-versa). There is nuance to each survey as there are different measurements from the economy to markets to industry conditions to the health of one’s personal financial situation.
At Allio, we view sentiment gauges as coincident indicators at best. Some see them as valuable leading macro clues, but it’s more likely that they simply tell us what we already know based on recent economic and market trends. They can even be a lagging indicator, which buttresses the case that such polling data is contrarian.
Putting Investor Sentiment in Its Place
Traders and active investors are always looking for an edge. As Warren Buffett said, “Be fearful when others are greedy and to be greedy only when others are fearful.” Likewise, a quote attributed to Baron Rothschild goes, “The time to buy is when there's blood in the streets.” Both the Oracle of Omaha and the 18th-century British nobleman get at the same notion: Psychology plays a critical role in investor success.
At Allio, we consider sentiment surveys secondary indicators to other macro variables. What’s going on with GDP growth, inflation, interest rates, monetary & fiscal policy, corporate earnings trends, and the broader economic machine weigh more in our approach to markets. Still, while these fundamentals are important, we also recognize how people feel about the economy and markets may drive short-term trends.
Cast in this light, such behavioral factors (including herd mentality and FOMO) can manifest themselves in price action, flow of funds, and momentum. Think of it like an ocean—Dalio’s macro investing principles are like the tides, ebbs & flows of the fundamentals are the waves, and sentiment surveys are the ripples.
Armed with the investor sentiment’s proper context, we can better navigate these short-term risk-on/risk-off dynamics and understand how they fit within the bigger macro picture.
The Major Sentiment Gauges
University of Michigan (UMich) Consumer Sentiment
UMich is a widely followed index measuring consumer attitudes about the current economic climate and expectations. It’s published twice monthly—a preliminary survey at the beginning of the month and a final read in the back half of the month. Upon each release, the financial media parses several components:
Sentiment (the headline number)
Current Conditions
Consumer Expectations
1-Year Inflation Expectations
5-Year Inflation Expectations
Prompting our team to dive into this topic has been the downright awful usefulness of the monthly UMich Surveys of Consumers report. Dating back to August 1946, it used to be an esteemed yardstick of how households felt about the economy and stock market. It began to break down, however, when inflation took off in 2022.
Rather than people offering their unbiased view of the US economy, it turned into a political partisan survey. Republicans were downbeat about fiscal and monetary matters, while Democrats gave a thumbs up to how the economy fared. Then, when President Trump was re-elected, it was a flip-flop based on party affiliation.
The inflation expectations sub-index was a prime example: As soon as Trump won in 2024, those on the left viewed inflation as skyrocketing, while the right expected a subdued rise in consumer prices. Today, the S&P 500 doesn’t swing quite as much as it used to, based on what UMich reveals.
So, we must look elsewhere for useful survey data.
UMich Consumer Sentiment History
Source: St. Louis Federal Reserve
The Conference Board’s Consumer Confidence Index (CCI)
While UMich is primarily a partisan political poll of inflation vibes, the CCI is a respected sentiment survey having more to do with the jobs market. Households’ feelings regarding trends in the employment situation tend to be less swayed by who is in the White House, so our team pays more attention to this one. Its sub-surveys include:
Present Situation Index
Expectations Index
Family Current and Expected Financial Situation
Perceived Likelihood of a US Recession over the Next 12 Months
According to The Conference Board, the CCI “reflects prevailing business conditions and likely developments for the months ahead. This monthly report details consumer attitudes, buying intentions, vacation plans, and consumer expectations for inflation, stock prices, and interest rates.”
It’s not immune to political mudslinging, though. The CCI was strong from 2017 through early 2020 before COVID-19's rampage. Recall that US real GDP growth was robust while inflation was hardly a topic on the evening news back then. While the S&P 500 has hit record highs and as most households are wealthier than ever, the CCI remains far below its lofty pre-pandemic range of 120-140.
As of early 2025, the Present Situation Index was far above the Expectations Index, suggesting that individuals, while still feeling the pinch from a 40-year high in the US CPI rate back in June of 2022, forecast the future to be worse than today. Interestingly, the Present Situation Index was below the Expectations Index following the GFC as households believed economic times would improve.
The Conference Board’s CCI Since 2007
Source: The Conference Board
The AAII Investor Sentiment Survey
Maybe the most volatile of all mood measures is the weekly report published by the American Association of Individual Investors (AAII). Each Thursday morning, you’ll see the financial blogosphere post graphics displaying the number of net bulls or net bears.
The readings can swing tremendously from one week to the next, so it’s crucial not to put undue emphasis on any one week’s report. Analyzing the sentiment trend via a moving average is the better approach, and, once again, it’s best to only pay attention to it when extreme levels are registered.
The AAII polls individual investors for their thoughts on market direction in the next six months. A longstanding survey (it began around the market crash of October 1987); a protracted period of high net bears can be a buy signal. When a 52-week high in net bulls is notched, that’s seen as a yellow flag.
AAII Investor Sentiment Survey History, 1-Year Moving Average (Green)
Source: AAII
NFIB Small Business Optimism Index
Small business strength is the lifeblood of the US economy, so feelings absolutely matter among entrepreneurs. The National Federation of Independent Business (NFIB) has collected small business trends since 1973, and the survey is published on the second Tuesday of each month. Once again, politics matters. It is well known that most small business owners lean Republican, so as the nation has become more polarized, we see the NFIB Small Business Optimism Index swayed accordingly.
Still, when the Index is above the 52-year average of 98, it’s generally taken as a positive signal. Upon each release, macro investors look for clues on business hiring plans, inflation expectations, and overall perceptions about the US economy and where it’s going.
NFIB Small Business Optimism Index Since 1986
Source: NFIB
Purchasing Managers Indexes (PMIs)
Larger businesses are surveyed for their feelings on the domestic economy, too. The Institute for Supply Management (ISM) and S&P Global release monthly Purchasing Managers’ Indexes. Some in the media mistake the finding for “hard” economic data. In fact, the data are “soft” in that they are merely a collection of responses to questions on current and expected industry conditions. So, they are grouped alongside UMich, the CCI, and the NFIB’s survey.
ISM PMIs are released during the first week of the month, while S&P Global’s version has a preliminary (flash) set and a final monthly update. Both offer insights into inflation, new orders, and employment, among other subindexes. Perhaps the distinguishing feature of the PMI reports is that they separately probe the manufacturing and services sides of the economy.
The CBOE Volatility Index (VIX)
Venturing further from traditional polls and pure sentiment surveys, the VIX Index is commonly quoted as the Wall Street “fear gauge.” It’s not a questionnaire, but where actual money is being laid. The VIX uses S&P 500 options pricing to measure expected stock market volatility. In practice, the higher the VIX level, the more anxiety; a low VIX suggests complacency.
Like the other barometers, the traditional approach to the VIX is to use it as a contrarian indicator—harvest profits and allocate defensively when the fear gauge is low and take on risk when the VIX spikes. It’s not that easy, though, as there can be prolonged periods of low or elevated volatility. 2017 was a fantastic year of S&P 500 gains with the VIX never climbing above 18; sitting on the sidelines early in Trump’s first term would have been a bad portfolio decision.
On the flip side, historical performance data point to soft returns when the VIX hovers in the 20s (above the long-term average of 18). Often, aggressively buying when the Index spikes to above 60 has been a profitable strategy, but there’s never a sure bet.
CBOE Volatility Index Since 1990
Source: Stockcharts.com
The CFTC Commitment of Traders (CoT) Report
If you really want to get into the weeds of market data, positioning reports are where you should look. The Commodity Futures Trading Commission (CFTC) oversees commodity and futures markets, and they tally how institutional investors, hedge funds, and retail traders are positioned across various futures markets.
The data is then divided into three categories: large speculators (non-commercials), large hedgers (commercials), and small traders. The upshot is that large speculators and commercial traders are the smart money. So, taking the opposite side of an extreme reading among uninformed small speculators is seen as the savvy play (e.g., when the CoT has a high net long reading among speculators, it may be a time to turn cautious on a particular commodity or index).
As with many contrarian sentiment litmus tests, you usually don’t want to make aggressive portfolio moves until an extreme is notched in one or more measures. For the CoT, when speculators are positioned to one side, that’s generally the time to act.
Signal from Noise: Taking a Dalio Approach to Sentiment Surveys
To be clear, parsing sentiment surveys weekly and monthly is not a high priority for us. As macro investors focused on broad trends, our team focuses on understanding and predicting economic cycles, effective diversification, and systematic risk management. We encourage you to do the same, or (better yet) invest with us through our Managed Macro Portfolios. dynamic asset allocation portfolios.
Ray Dalio’s macro investing approach is not about getting in and out of markets based on vibes. At the same time, we recognize that sentiment gauges are—in some rare instances—leading indicators of market turning points. So, they should not be dismissed.
What’s more, how households view the economy has implications for consumer spending trends and business investment. Once again, however, we’ve seen lately that how consumersconsumer respond in polls can be FAR different from their actual behavior.
The Cycle of Investor Psychology
Source: Investor Behavior: The Psychology of Financial Planning and Investing
The Dalio approach to sentiment scores takes into account the reality that monetary policymakers, such as the Fed, pay attention to market sentiment—when there’s too much froth and “irrational exuberance,” a greater likelihood exists that interest rates will increase. That then impacts other asset classes like stocks, bonds, cash rates, commodities, real estate, gold, and cryptocurrency.
Investor sentiment is most closely linked to the Short-Term Debt Cycle. Dalio’s economic machine framework details multi-year periods during which the availability of credit expands and contracts, and itsit’s investor and consumer sentiment that can help identify where we are in the cycle:
Early Cycle: Following a bottom in the stock market, households begin to feel better as the economy recovers after a period of despondency, credit starts to expand
Mid-Cycle: Stock prices begin to peak ahead of the strongest GDP gains, inflation is in check, sentiment continues to improve.
Late Cycle: Economic growth peaks, the Fed begins raising interest rates, inflation turns higher, and sentiment may reach euphoric levels.
Recession: GDP contracts, the Fed begins cutting rates, stocks have already plunged, investors are pessimistic, credit tightens
It’s important to understand that sentiment analysis doesn’t mean a whole lot compared to Dalio’s Big Cycle Theory, which explains the rise and fall of great world powers over 50–100-year periods. Still, sentiment can assess ripples in the great ocean that is The Big Cycle.
If you want to follow Dalio’s framework, you must know that all markets are driven by four key determinants: growth, inflation, risk premiums, and discount rates. Sentiment indicators can provide insights into how market participants perceive these factors, particularly in terms of growth expectations and prevailing risk.
The Bottom Line
Not all market indicators should be weighed the same when making portfolio decisions. Investor, consumer, and business sentiment gauges may offer some macro clues, but rarely are they accurate and powerful bellwethers. Think of sentiment as a compass, not a map, along your macro investing journey—they can tap into market psychology, risk appetite, and some near-term economic conditions, but they shouldn’t replace fundamental macro analysis.
Pairing sentiment assessment with Dalio’s principles is a better method for managing risk and growing your wealth.
Interested in trying your hand at macro investing? Invest with a custom Dynamic Macro Portfolio or let us do the heavy lifting with one of our Managed Portfolios.
Investor, Consumer, and Business Sentiment: The Pulse of Markets and Economies & Macro Implications
Sentiment measures are widely quoted in today’s financial media, but framing them in light of proper macro investing principles is key
Vibes are often contrarian signals, but there’s nuance that must be considered
Using Ray Dalio’s framework, we can effectively manage risk with the help of sentiment barometers
Politics has seeped into so many facets of financial markets. It used to be that the economy was, of course, a primary issue on campaign trails, but investors’ collective feelings on the state of household finances and where the stock market was headed were largely separated from which party was in the White House. That has all changed—look no further than investor and consumer sentiment polls.
Over time (primarily after the 2008 Great Financial Crisis (GFC)), people began linking their political views to mainstream issues. That trend made traditional gauges of market and macro sentiment less useful. Former President Obama’s controversial Affordable Care Act (ACA), President Trump’s 2017 Tax Cuts and Jobs Act (TCJA), former President Biden’s slew of stimulus measures, including poorly named Inflation Reduction Act (IRA), and Trump 2.0’s aggressive tariff rhetoric all play a role in American’s seemingly being permanently divided when it comes to economic vibes.
Let’s dive into the various investor and consumer sentiment measurements, what they are, when they can be useful, and how they should be framed within Ray Dalio’s macro investing principles.
What Are Sentiment Gauges?
The Consumer Confidence Index, University of Michigan Consumer Sentiment, AAII Investor Survey, CBOE Volatility Index, and CFTC Commitment of Traders report are, among others, the widely reported sentiment indicators. They assess the market participants’ collective mood, including small and large investors, consumers, households, small businesses, and managers in the services and manufacturing sectors.
They are also considered “contrarian” indicators, meaning when there’s extreme sentiment, the wise play is to take the other side—if everyone is bearish, you should be bullish (and vice-versa). There is nuance to each survey as there are different measurements from the economy to markets to industry conditions to the health of one’s personal financial situation.
At Allio, we view sentiment gauges as coincident indicators at best. Some see them as valuable leading macro clues, but it’s more likely that they simply tell us what we already know based on recent economic and market trends. They can even be a lagging indicator, which buttresses the case that such polling data is contrarian.
Putting Investor Sentiment in Its Place
Traders and active investors are always looking for an edge. As Warren Buffett said, “Be fearful when others are greedy and to be greedy only when others are fearful.” Likewise, a quote attributed to Baron Rothschild goes, “The time to buy is when there's blood in the streets.” Both the Oracle of Omaha and the 18th-century British nobleman get at the same notion: Psychology plays a critical role in investor success.
At Allio, we consider sentiment surveys secondary indicators to other macro variables. What’s going on with GDP growth, inflation, interest rates, monetary & fiscal policy, corporate earnings trends, and the broader economic machine weigh more in our approach to markets. Still, while these fundamentals are important, we also recognize how people feel about the economy and markets may drive short-term trends.
Cast in this light, such behavioral factors (including herd mentality and FOMO) can manifest themselves in price action, flow of funds, and momentum. Think of it like an ocean—Dalio’s macro investing principles are like the tides, ebbs & flows of the fundamentals are the waves, and sentiment surveys are the ripples.
Armed with the investor sentiment’s proper context, we can better navigate these short-term risk-on/risk-off dynamics and understand how they fit within the bigger macro picture.
The Major Sentiment Gauges
University of Michigan (UMich) Consumer Sentiment
UMich is a widely followed index measuring consumer attitudes about the current economic climate and expectations. It’s published twice monthly—a preliminary survey at the beginning of the month and a final read in the back half of the month. Upon each release, the financial media parses several components:
Sentiment (the headline number)
Current Conditions
Consumer Expectations
1-Year Inflation Expectations
5-Year Inflation Expectations
Prompting our team to dive into this topic has been the downright awful usefulness of the monthly UMich Surveys of Consumers report. Dating back to August 1946, it used to be an esteemed yardstick of how households felt about the economy and stock market. It began to break down, however, when inflation took off in 2022.
Rather than people offering their unbiased view of the US economy, it turned into a political partisan survey. Republicans were downbeat about fiscal and monetary matters, while Democrats gave a thumbs up to how the economy fared. Then, when President Trump was re-elected, it was a flip-flop based on party affiliation.
The inflation expectations sub-index was a prime example: As soon as Trump won in 2024, those on the left viewed inflation as skyrocketing, while the right expected a subdued rise in consumer prices. Today, the S&P 500 doesn’t swing quite as much as it used to, based on what UMich reveals.
So, we must look elsewhere for useful survey data.
UMich Consumer Sentiment History
Source: St. Louis Federal Reserve
The Conference Board’s Consumer Confidence Index (CCI)
While UMich is primarily a partisan political poll of inflation vibes, the CCI is a respected sentiment survey having more to do with the jobs market. Households’ feelings regarding trends in the employment situation tend to be less swayed by who is in the White House, so our team pays more attention to this one. Its sub-surveys include:
Present Situation Index
Expectations Index
Family Current and Expected Financial Situation
Perceived Likelihood of a US Recession over the Next 12 Months
According to The Conference Board, the CCI “reflects prevailing business conditions and likely developments for the months ahead. This monthly report details consumer attitudes, buying intentions, vacation plans, and consumer expectations for inflation, stock prices, and interest rates.”
It’s not immune to political mudslinging, though. The CCI was strong from 2017 through early 2020 before COVID-19's rampage. Recall that US real GDP growth was robust while inflation was hardly a topic on the evening news back then. While the S&P 500 has hit record highs and as most households are wealthier than ever, the CCI remains far below its lofty pre-pandemic range of 120-140.
As of early 2025, the Present Situation Index was far above the Expectations Index, suggesting that individuals, while still feeling the pinch from a 40-year high in the US CPI rate back in June of 2022, forecast the future to be worse than today. Interestingly, the Present Situation Index was below the Expectations Index following the GFC as households believed economic times would improve.
The Conference Board’s CCI Since 2007
Source: The Conference Board
The AAII Investor Sentiment Survey
Maybe the most volatile of all mood measures is the weekly report published by the American Association of Individual Investors (AAII). Each Thursday morning, you’ll see the financial blogosphere post graphics displaying the number of net bulls or net bears.
The readings can swing tremendously from one week to the next, so it’s crucial not to put undue emphasis on any one week’s report. Analyzing the sentiment trend via a moving average is the better approach, and, once again, it’s best to only pay attention to it when extreme levels are registered.
The AAII polls individual investors for their thoughts on market direction in the next six months. A longstanding survey (it began around the market crash of October 1987); a protracted period of high net bears can be a buy signal. When a 52-week high in net bulls is notched, that’s seen as a yellow flag.
AAII Investor Sentiment Survey History, 1-Year Moving Average (Green)
Source: AAII
NFIB Small Business Optimism Index
Small business strength is the lifeblood of the US economy, so feelings absolutely matter among entrepreneurs. The National Federation of Independent Business (NFIB) has collected small business trends since 1973, and the survey is published on the second Tuesday of each month. Once again, politics matters. It is well known that most small business owners lean Republican, so as the nation has become more polarized, we see the NFIB Small Business Optimism Index swayed accordingly.
Still, when the Index is above the 52-year average of 98, it’s generally taken as a positive signal. Upon each release, macro investors look for clues on business hiring plans, inflation expectations, and overall perceptions about the US economy and where it’s going.
NFIB Small Business Optimism Index Since 1986
Source: NFIB
Purchasing Managers Indexes (PMIs)
Larger businesses are surveyed for their feelings on the domestic economy, too. The Institute for Supply Management (ISM) and S&P Global release monthly Purchasing Managers’ Indexes. Some in the media mistake the finding for “hard” economic data. In fact, the data are “soft” in that they are merely a collection of responses to questions on current and expected industry conditions. So, they are grouped alongside UMich, the CCI, and the NFIB’s survey.
ISM PMIs are released during the first week of the month, while S&P Global’s version has a preliminary (flash) set and a final monthly update. Both offer insights into inflation, new orders, and employment, among other subindexes. Perhaps the distinguishing feature of the PMI reports is that they separately probe the manufacturing and services sides of the economy.
The CBOE Volatility Index (VIX)
Venturing further from traditional polls and pure sentiment surveys, the VIX Index is commonly quoted as the Wall Street “fear gauge.” It’s not a questionnaire, but where actual money is being laid. The VIX uses S&P 500 options pricing to measure expected stock market volatility. In practice, the higher the VIX level, the more anxiety; a low VIX suggests complacency.
Like the other barometers, the traditional approach to the VIX is to use it as a contrarian indicator—harvest profits and allocate defensively when the fear gauge is low and take on risk when the VIX spikes. It’s not that easy, though, as there can be prolonged periods of low or elevated volatility. 2017 was a fantastic year of S&P 500 gains with the VIX never climbing above 18; sitting on the sidelines early in Trump’s first term would have been a bad portfolio decision.
On the flip side, historical performance data point to soft returns when the VIX hovers in the 20s (above the long-term average of 18). Often, aggressively buying when the Index spikes to above 60 has been a profitable strategy, but there’s never a sure bet.
CBOE Volatility Index Since 1990
Source: Stockcharts.com
The CFTC Commitment of Traders (CoT) Report
If you really want to get into the weeds of market data, positioning reports are where you should look. The Commodity Futures Trading Commission (CFTC) oversees commodity and futures markets, and they tally how institutional investors, hedge funds, and retail traders are positioned across various futures markets.
The data is then divided into three categories: large speculators (non-commercials), large hedgers (commercials), and small traders. The upshot is that large speculators and commercial traders are the smart money. So, taking the opposite side of an extreme reading among uninformed small speculators is seen as the savvy play (e.g., when the CoT has a high net long reading among speculators, it may be a time to turn cautious on a particular commodity or index).
As with many contrarian sentiment litmus tests, you usually don’t want to make aggressive portfolio moves until an extreme is notched in one or more measures. For the CoT, when speculators are positioned to one side, that’s generally the time to act.
Signal from Noise: Taking a Dalio Approach to Sentiment Surveys
To be clear, parsing sentiment surveys weekly and monthly is not a high priority for us. As macro investors focused on broad trends, our team focuses on understanding and predicting economic cycles, effective diversification, and systematic risk management. We encourage you to do the same, or (better yet) invest with us through our Managed Macro Portfolios. dynamic asset allocation portfolios.
Ray Dalio’s macro investing approach is not about getting in and out of markets based on vibes. At the same time, we recognize that sentiment gauges are—in some rare instances—leading indicators of market turning points. So, they should not be dismissed.
What’s more, how households view the economy has implications for consumer spending trends and business investment. Once again, however, we’ve seen lately that how consumersconsumer respond in polls can be FAR different from their actual behavior.
The Cycle of Investor Psychology
Source: Investor Behavior: The Psychology of Financial Planning and Investing
The Dalio approach to sentiment scores takes into account the reality that monetary policymakers, such as the Fed, pay attention to market sentiment—when there’s too much froth and “irrational exuberance,” a greater likelihood exists that interest rates will increase. That then impacts other asset classes like stocks, bonds, cash rates, commodities, real estate, gold, and cryptocurrency.
Investor sentiment is most closely linked to the Short-Term Debt Cycle. Dalio’s economic machine framework details multi-year periods during which the availability of credit expands and contracts, and itsit’s investor and consumer sentiment that can help identify where we are in the cycle:
Early Cycle: Following a bottom in the stock market, households begin to feel better as the economy recovers after a period of despondency, credit starts to expand
Mid-Cycle: Stock prices begin to peak ahead of the strongest GDP gains, inflation is in check, sentiment continues to improve.
Late Cycle: Economic growth peaks, the Fed begins raising interest rates, inflation turns higher, and sentiment may reach euphoric levels.
Recession: GDP contracts, the Fed begins cutting rates, stocks have already plunged, investors are pessimistic, credit tightens
It’s important to understand that sentiment analysis doesn’t mean a whole lot compared to Dalio’s Big Cycle Theory, which explains the rise and fall of great world powers over 50–100-year periods. Still, sentiment can assess ripples in the great ocean that is The Big Cycle.
If you want to follow Dalio’s framework, you must know that all markets are driven by four key determinants: growth, inflation, risk premiums, and discount rates. Sentiment indicators can provide insights into how market participants perceive these factors, particularly in terms of growth expectations and prevailing risk.
The Bottom Line
Not all market indicators should be weighed the same when making portfolio decisions. Investor, consumer, and business sentiment gauges may offer some macro clues, but rarely are they accurate and powerful bellwethers. Think of sentiment as a compass, not a map, along your macro investing journey—they can tap into market psychology, risk appetite, and some near-term economic conditions, but they shouldn’t replace fundamental macro analysis.
Pairing sentiment assessment with Dalio’s principles is a better method for managing risk and growing your wealth.
Interested in trying your hand at macro investing? Invest with a custom Dynamic Macro Portfolio or let us do the heavy lifting with one of our Managed Portfolios.
Investor, Consumer, and Business Sentiment: The Pulse of Markets and Economies & Macro Implications
Sentiment measures are widely quoted in today’s financial media, but framing them in light of proper macro investing principles is key
Vibes are often contrarian signals, but there’s nuance that must be considered
Using Ray Dalio’s framework, we can effectively manage risk with the help of sentiment barometers
Politics has seeped into so many facets of financial markets. It used to be that the economy was, of course, a primary issue on campaign trails, but investors’ collective feelings on the state of household finances and where the stock market was headed were largely separated from which party was in the White House. That has all changed—look no further than investor and consumer sentiment polls.
Over time (primarily after the 2008 Great Financial Crisis (GFC)), people began linking their political views to mainstream issues. That trend made traditional gauges of market and macro sentiment less useful. Former President Obama’s controversial Affordable Care Act (ACA), President Trump’s 2017 Tax Cuts and Jobs Act (TCJA), former President Biden’s slew of stimulus measures, including poorly named Inflation Reduction Act (IRA), and Trump 2.0’s aggressive tariff rhetoric all play a role in American’s seemingly being permanently divided when it comes to economic vibes.
Let’s dive into the various investor and consumer sentiment measurements, what they are, when they can be useful, and how they should be framed within Ray Dalio’s macro investing principles.
What Are Sentiment Gauges?
The Consumer Confidence Index, University of Michigan Consumer Sentiment, AAII Investor Survey, CBOE Volatility Index, and CFTC Commitment of Traders report are, among others, the widely reported sentiment indicators. They assess the market participants’ collective mood, including small and large investors, consumers, households, small businesses, and managers in the services and manufacturing sectors.
They are also considered “contrarian” indicators, meaning when there’s extreme sentiment, the wise play is to take the other side—if everyone is bearish, you should be bullish (and vice-versa). There is nuance to each survey as there are different measurements from the economy to markets to industry conditions to the health of one’s personal financial situation.
At Allio, we view sentiment gauges as coincident indicators at best. Some see them as valuable leading macro clues, but it’s more likely that they simply tell us what we already know based on recent economic and market trends. They can even be a lagging indicator, which buttresses the case that such polling data is contrarian.
Putting Investor Sentiment in Its Place
Traders and active investors are always looking for an edge. As Warren Buffett said, “Be fearful when others are greedy and to be greedy only when others are fearful.” Likewise, a quote attributed to Baron Rothschild goes, “The time to buy is when there's blood in the streets.” Both the Oracle of Omaha and the 18th-century British nobleman get at the same notion: Psychology plays a critical role in investor success.
At Allio, we consider sentiment surveys secondary indicators to other macro variables. What’s going on with GDP growth, inflation, interest rates, monetary & fiscal policy, corporate earnings trends, and the broader economic machine weigh more in our approach to markets. Still, while these fundamentals are important, we also recognize how people feel about the economy and markets may drive short-term trends.
Cast in this light, such behavioral factors (including herd mentality and FOMO) can manifest themselves in price action, flow of funds, and momentum. Think of it like an ocean—Dalio’s macro investing principles are like the tides, ebbs & flows of the fundamentals are the waves, and sentiment surveys are the ripples.
Armed with the investor sentiment’s proper context, we can better navigate these short-term risk-on/risk-off dynamics and understand how they fit within the bigger macro picture.
The Major Sentiment Gauges
University of Michigan (UMich) Consumer Sentiment
UMich is a widely followed index measuring consumer attitudes about the current economic climate and expectations. It’s published twice monthly—a preliminary survey at the beginning of the month and a final read in the back half of the month. Upon each release, the financial media parses several components:
Sentiment (the headline number)
Current Conditions
Consumer Expectations
1-Year Inflation Expectations
5-Year Inflation Expectations
Prompting our team to dive into this topic has been the downright awful usefulness of the monthly UMich Surveys of Consumers report. Dating back to August 1946, it used to be an esteemed yardstick of how households felt about the economy and stock market. It began to break down, however, when inflation took off in 2022.
Rather than people offering their unbiased view of the US economy, it turned into a political partisan survey. Republicans were downbeat about fiscal and monetary matters, while Democrats gave a thumbs up to how the economy fared. Then, when President Trump was re-elected, it was a flip-flop based on party affiliation.
The inflation expectations sub-index was a prime example: As soon as Trump won in 2024, those on the left viewed inflation as skyrocketing, while the right expected a subdued rise in consumer prices. Today, the S&P 500 doesn’t swing quite as much as it used to, based on what UMich reveals.
So, we must look elsewhere for useful survey data.
UMich Consumer Sentiment History
Source: St. Louis Federal Reserve
The Conference Board’s Consumer Confidence Index (CCI)
While UMich is primarily a partisan political poll of inflation vibes, the CCI is a respected sentiment survey having more to do with the jobs market. Households’ feelings regarding trends in the employment situation tend to be less swayed by who is in the White House, so our team pays more attention to this one. Its sub-surveys include:
Present Situation Index
Expectations Index
Family Current and Expected Financial Situation
Perceived Likelihood of a US Recession over the Next 12 Months
According to The Conference Board, the CCI “reflects prevailing business conditions and likely developments for the months ahead. This monthly report details consumer attitudes, buying intentions, vacation plans, and consumer expectations for inflation, stock prices, and interest rates.”
It’s not immune to political mudslinging, though. The CCI was strong from 2017 through early 2020 before COVID-19's rampage. Recall that US real GDP growth was robust while inflation was hardly a topic on the evening news back then. While the S&P 500 has hit record highs and as most households are wealthier than ever, the CCI remains far below its lofty pre-pandemic range of 120-140.
As of early 2025, the Present Situation Index was far above the Expectations Index, suggesting that individuals, while still feeling the pinch from a 40-year high in the US CPI rate back in June of 2022, forecast the future to be worse than today. Interestingly, the Present Situation Index was below the Expectations Index following the GFC as households believed economic times would improve.
The Conference Board’s CCI Since 2007
Source: The Conference Board
The AAII Investor Sentiment Survey
Maybe the most volatile of all mood measures is the weekly report published by the American Association of Individual Investors (AAII). Each Thursday morning, you’ll see the financial blogosphere post graphics displaying the number of net bulls or net bears.
The readings can swing tremendously from one week to the next, so it’s crucial not to put undue emphasis on any one week’s report. Analyzing the sentiment trend via a moving average is the better approach, and, once again, it’s best to only pay attention to it when extreme levels are registered.
The AAII polls individual investors for their thoughts on market direction in the next six months. A longstanding survey (it began around the market crash of October 1987); a protracted period of high net bears can be a buy signal. When a 52-week high in net bulls is notched, that’s seen as a yellow flag.
AAII Investor Sentiment Survey History, 1-Year Moving Average (Green)
Source: AAII
NFIB Small Business Optimism Index
Small business strength is the lifeblood of the US economy, so feelings absolutely matter among entrepreneurs. The National Federation of Independent Business (NFIB) has collected small business trends since 1973, and the survey is published on the second Tuesday of each month. Once again, politics matters. It is well known that most small business owners lean Republican, so as the nation has become more polarized, we see the NFIB Small Business Optimism Index swayed accordingly.
Still, when the Index is above the 52-year average of 98, it’s generally taken as a positive signal. Upon each release, macro investors look for clues on business hiring plans, inflation expectations, and overall perceptions about the US economy and where it’s going.
NFIB Small Business Optimism Index Since 1986
Source: NFIB
Purchasing Managers Indexes (PMIs)
Larger businesses are surveyed for their feelings on the domestic economy, too. The Institute for Supply Management (ISM) and S&P Global release monthly Purchasing Managers’ Indexes. Some in the media mistake the finding for “hard” economic data. In fact, the data are “soft” in that they are merely a collection of responses to questions on current and expected industry conditions. So, they are grouped alongside UMich, the CCI, and the NFIB’s survey.
ISM PMIs are released during the first week of the month, while S&P Global’s version has a preliminary (flash) set and a final monthly update. Both offer insights into inflation, new orders, and employment, among other subindexes. Perhaps the distinguishing feature of the PMI reports is that they separately probe the manufacturing and services sides of the economy.
The CBOE Volatility Index (VIX)
Venturing further from traditional polls and pure sentiment surveys, the VIX Index is commonly quoted as the Wall Street “fear gauge.” It’s not a questionnaire, but where actual money is being laid. The VIX uses S&P 500 options pricing to measure expected stock market volatility. In practice, the higher the VIX level, the more anxiety; a low VIX suggests complacency.
Like the other barometers, the traditional approach to the VIX is to use it as a contrarian indicator—harvest profits and allocate defensively when the fear gauge is low and take on risk when the VIX spikes. It’s not that easy, though, as there can be prolonged periods of low or elevated volatility. 2017 was a fantastic year of S&P 500 gains with the VIX never climbing above 18; sitting on the sidelines early in Trump’s first term would have been a bad portfolio decision.
On the flip side, historical performance data point to soft returns when the VIX hovers in the 20s (above the long-term average of 18). Often, aggressively buying when the Index spikes to above 60 has been a profitable strategy, but there’s never a sure bet.
CBOE Volatility Index Since 1990
Source: Stockcharts.com
The CFTC Commitment of Traders (CoT) Report
If you really want to get into the weeds of market data, positioning reports are where you should look. The Commodity Futures Trading Commission (CFTC) oversees commodity and futures markets, and they tally how institutional investors, hedge funds, and retail traders are positioned across various futures markets.
The data is then divided into three categories: large speculators (non-commercials), large hedgers (commercials), and small traders. The upshot is that large speculators and commercial traders are the smart money. So, taking the opposite side of an extreme reading among uninformed small speculators is seen as the savvy play (e.g., when the CoT has a high net long reading among speculators, it may be a time to turn cautious on a particular commodity or index).
As with many contrarian sentiment litmus tests, you usually don’t want to make aggressive portfolio moves until an extreme is notched in one or more measures. For the CoT, when speculators are positioned to one side, that’s generally the time to act.
Signal from Noise: Taking a Dalio Approach to Sentiment Surveys
To be clear, parsing sentiment surveys weekly and monthly is not a high priority for us. As macro investors focused on broad trends, our team focuses on understanding and predicting economic cycles, effective diversification, and systematic risk management. We encourage you to do the same, or (better yet) invest with us through our Managed Macro Portfolios. dynamic asset allocation portfolios.
Ray Dalio’s macro investing approach is not about getting in and out of markets based on vibes. At the same time, we recognize that sentiment gauges are—in some rare instances—leading indicators of market turning points. So, they should not be dismissed.
What’s more, how households view the economy has implications for consumer spending trends and business investment. Once again, however, we’ve seen lately that how consumersconsumer respond in polls can be FAR different from their actual behavior.
The Cycle of Investor Psychology
Source: Investor Behavior: The Psychology of Financial Planning and Investing
The Dalio approach to sentiment scores takes into account the reality that monetary policymakers, such as the Fed, pay attention to market sentiment—when there’s too much froth and “irrational exuberance,” a greater likelihood exists that interest rates will increase. That then impacts other asset classes like stocks, bonds, cash rates, commodities, real estate, gold, and cryptocurrency.
Investor sentiment is most closely linked to the Short-Term Debt Cycle. Dalio’s economic machine framework details multi-year periods during which the availability of credit expands and contracts, and itsit’s investor and consumer sentiment that can help identify where we are in the cycle:
Early Cycle: Following a bottom in the stock market, households begin to feel better as the economy recovers after a period of despondency, credit starts to expand
Mid-Cycle: Stock prices begin to peak ahead of the strongest GDP gains, inflation is in check, sentiment continues to improve.
Late Cycle: Economic growth peaks, the Fed begins raising interest rates, inflation turns higher, and sentiment may reach euphoric levels.
Recession: GDP contracts, the Fed begins cutting rates, stocks have already plunged, investors are pessimistic, credit tightens
It’s important to understand that sentiment analysis doesn’t mean a whole lot compared to Dalio’s Big Cycle Theory, which explains the rise and fall of great world powers over 50–100-year periods. Still, sentiment can assess ripples in the great ocean that is The Big Cycle.
If you want to follow Dalio’s framework, you must know that all markets are driven by four key determinants: growth, inflation, risk premiums, and discount rates. Sentiment indicators can provide insights into how market participants perceive these factors, particularly in terms of growth expectations and prevailing risk.
The Bottom Line
Not all market indicators should be weighed the same when making portfolio decisions. Investor, consumer, and business sentiment gauges may offer some macro clues, but rarely are they accurate and powerful bellwethers. Think of sentiment as a compass, not a map, along your macro investing journey—they can tap into market psychology, risk appetite, and some near-term economic conditions, but they shouldn’t replace fundamental macro analysis.
Pairing sentiment assessment with Dalio’s principles is a better method for managing risk and growing your wealth.
Interested in trying your hand at macro investing? Invest with a custom Dynamic Macro Portfolio or let us do the heavy lifting with one of our Managed Portfolios.
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Disclosures
This material is for informational purposes only and should not be construed as financial, legal, or tax advice. You should consult your own financial, legal, and tax advisors before engaging in any transaction. Information, including hypothetical projections of finances, may not take into account taxes, commissions, or other factors which may significantly affect potential outcomes. This material should not be considered an offer or recommendation to buy or sell a security. While information and sources are believed to be accurate, Allio Capital does not guarantee the accuracy or completeness of any information or source provided herein and is under no obligation to update this information.
Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Performance could be volatile; an investment in a fund or an account may lose money.
There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market.
Disclosures
This material is for informational purposes only and should not be construed as financial, legal, or tax advice. You should consult your own financial, legal, and tax advisors before engaging in any transaction. Information, including hypothetical projections of finances, may not take into account taxes, commissions, or other factors which may significantly affect potential outcomes. This material should not be considered an offer or recommendation to buy or sell a security. While information and sources are believed to be accurate, Allio Capital does not guarantee the accuracy or completeness of any information or source provided herein and is under no obligation to update this information.
Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Performance could be volatile; an investment in a fund or an account may lose money.
There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market.
Disclosures
This material is for informational purposes only and should not be construed as financial, legal, or tax advice. You should consult your own financial, legal, and tax advisors before engaging in any transaction. Information, including hypothetical projections of finances, may not take into account taxes, commissions, or other factors which may significantly affect potential outcomes. This material should not be considered an offer or recommendation to buy or sell a security. While information and sources are believed to be accurate, Allio Capital does not guarantee the accuracy or completeness of any information or source provided herein and is under no obligation to update this information.
Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Performance could be volatile; an investment in a fund or an account may lose money.
There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market.
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Allio Advisors LLC ("Allio") is an SEC registered investment advisor. By using this website, you accept our Terms of Service and our Privacy Policy. Allio's investment advisory services are available only to residents of the United States. Nothing on this website should be considered an offer, recommendation, solicitation of an offer, or advice to buy or sell any security. The information provided herein is for informational and general educational purposes only and is not investment or financial advice. Additionally, Allio does not provide tax advice and investors are encouraged to consult with their tax advisor. By law, we must provide investment advice that is in the best interest of our client. Please refer to Allio's ADV Part 2A Brochure for important additional information. Please see our Customer Relationship Summary.
Online trading has inherent risk due to system response, execution price, speed, liquidity, market data and access times that may vary due to market conditions, system performance, market volatility, size and type of order and other factors. An investor should understand these and additional risks before trading. Any historical returns, expected returns, or probability projections are hypothetical in nature and may not reflect actual future performance. Past performance is no guarantee of future results.
Brokerage services will be provided to Allio clients through Allio Markets LLC, ("Allio Markets") SEC-registered broker-dealer and member FINRA/SIPC . Securities in your account protected up to $500,000. For details, please see www.sipc.org. Allio Advisors LLC and Allio Markets LLC are separate but affiliated companies.
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Allio Advisors LLC ("Allio") is an SEC registered investment advisor. By using this website, you accept our Terms of Service and our Privacy Policy. Allio's investment advisory services are available only to residents of the United States. Nothing on this website should be considered an offer, recommendation, solicitation of an offer, or advice to buy or sell any security. The information provided herein is for informational and general educational purposes only and is not investment or financial advice. Additionally, Allio does not provide tax advice and investors are encouraged to consult with their tax advisor. By law, we must provide investment advice that is in the best interest of our client. Please refer to Allio's ADV Part 2A Brochure for important additional information. Please see our Customer Relationship Summary.
Online trading has inherent risk due to system response, execution price, speed, liquidity, market data and access times that may vary due to market conditions, system performance, market volatility, size and type of order and other factors. An investor should understand these and additional risks before trading. Any historical returns, expected returns, or probability projections are hypothetical in nature and may not reflect actual future performance. Past performance is no guarantee of future results.
Brokerage services will be provided to Allio clients through Allio Markets LLC, ("Allio Markets") SEC-registered broker-dealer and member FINRA/SIPC . Securities in your account protected up to $500,000. For details, please see www.sipc.org. Allio Advisors LLC and Allio Markets LLC are separate but affiliated companies.
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