Business Cycle Variations in Manager and Investor Sentiment Indices

Abstract

I find that the highly regarded investor and manager sentiment indices demonstrate both cyclical and persistent variations. The presence of cyclicality in the orthogonalized indices suggests the existence of feedback loops connecting sentiment with economic or market outcomes. For example, optimistic sentiment can stimulate increased consumer spending and investment, thereby fostering economic growth and further boosting sentiment. These feedback loops have the potential to amplify cyclical sentiment trends and increase the volatility of economic and market cycles, leading to persistent cycles driven by feedback mechanisms. Importantly, my results remain robust against potential mean reversion resulting from heuristic behaviors such as herding and overreaction, as well as against random behavior arising from intermittent bubbles characterized by near-rational learning and potential overextrapolation bias.