Stocktake: CEO optimism hits new heights

American chief executives are more confident than at any time over the last 45 years. That’s a good sign for the US economy, but not necessarily for investors.

CEO confidence has historically worked as a contrarian indicator, says Schwab strategist Liz Ann Sonders, who notes the Conference Board Measure of CEO Confidence recently hit 82 – its highest level since its inception in 1976.

Things were very different a year ago, when CEO confidence hit a low of 34. Of course, stocks promptly soared as investors anticipated the eventual economic rebound. As for now, the spike in CEO confidence might signal the current environment is “as good as it gets”, cautions Sonders.

Her data suggests grounds for caution. Stocks have averaged annualised returns of 12.4 per cent when CEOs have been pessimistic, compared to just 0.4 per cent in periods of CEO optimism (readings above 65).

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The combination of peak economic growth and stretched sentiment is a risk in the second part of 2021, says Sonders. Investors should not succumb to FOMO (fear of missing out), she says; this is a time for discipline and diversification.