(Yahoo! Finance) - Stocks are having their best year this millennium.
The S&P 500 (^GSPC) is up 27% this year, notching 55 record closing highs, and is on track to deliver the best annual return since 1997.
For investors gathered around the holiday dinner table, it's only natural to ask: Is it time to worry about "animal spirits" and exuberant investor sentiment?
The answer for most longer-term investors is probably not.
On a recent episode of Yahoo Finance's Stocks in Translation, Bret Kenwell, eToro US investment and options analyst, emphasized that while market sentiment can swing wildly, it shouldn't derail a long-term investment strategy.
"[Investors] have to be really guarded with how they filter information and how they let that impact their decision making," he said (see video above or listen below). "I think they just have to be careful about letting too much noise in."
Market sentiment can be bullish or bearish and refers to investors' attitudes, emotions, and behaviors toward a company, a sector, or an entire market.
At any given time, investors face a deluge of sentiment data from indicators like investor surveys, market volatility readings such as the VIX (^VIX), options market gauges like the put/call ratio, technical analysis patterns, and more. Trying to track them all can make an investor's head spin.
But sentiment can and does change on a dime, and Kenwell reminded investors just how fickle sentiment can be when prices are gyrating.
"Nothing changes sentiment like price," he said. "Things can feel like the world's ending. [Then] the market pops back to life, and all of a sudden, everyone feels OK."
For active traders, sentiment tends to be most useful at extremes, helping sniff out market imbalances that stem from a herd mentality. Since sentiment investing is a contrary strategy, sentiment investors often find themselves fighting the herd, which can be unsettling for the unseasoned.
As for passive investors, Kenwell advised staying the course and avoiding the temptation to time the market.
"If you're putting money away every paycheck, you probably shouldn't really worry that much about sentiment," he said.
Kenwell's message for investors is to focus on the basics: earnings growth, Federal Reserve policies, and the overall economy.
He highlighted that double-digit earnings growth is expected for the S&P 500 through 2025. He also noted that the Fed appears dovish and the economy continues to show resilience.
"Right now, we have all three of those things working in bulls' favor," he said.
By Jared Blikre
