Does investor sentiment predict the S&P500? Evidence from the 1990s to the Covid-19 pandemic

Abstract

This paper considers how the relationship between investor sentiment and the S&P500 index has changed over time. First, we identify multiple structural breaks in investor sentiment from the late-1980s through early 2023. Second, we find evidence that a positive shock to the S&P500 has a predictive and persistent effect on bullish sentiment over our identified sub-periods; however, we find that persistence wanes over the sample period. We find a corresponding effect for bearish sentiment, yet the persistence of that effect is generally similar across time. Lastly, we find that the effect of investor sentiment on market volatility is more significant in later sub-periods.