Value Confusion

May you live in interesting times. That's the saying sometimes known as the "Chinese curse" and it's often repeated these days with the required hint of irony. Whether it's politics at home or abroad, geopolitics and warmongering, globalism versus nationalism, possible government shutdowns, or how the stock and bond markets react to it all, these certainly are interesting times.

It's no wonder in the context of all this uncertainty that people often don't know what to think about investing. Is it a good time to invest, a bad time, or should we dig out those old alpaca farming brochures? Two recent investor surveys seem to show this confusion but they're interesting to look at nonetheless.

As I have noted in prior posts, the American Association of Individual Investors (AAII) regularly publishes an investor sentiment survey asking respondents a simple question: Do you feel the direction of the market over the next six months will be up (bullish), no change (neutral) or down (bearish)? As AAII says, this question is great for gauging the "mood" of individual investors.

Last week's result is below but individual investors, for quite a while now, have been in the "bearish" camp with "bullish" investors in the distinct minority. This has been true even as stock prices climb and market indexes like the Dow Jones Industrial Average and S&P 500 reach record highs.

From a different standpoint we get seemingly contrary information. Bespoke Investment Group, my research partners, created an "Irrational Exuberance Indicator" which uses survey data from Yale to track the mood of both individual and institutional investors regarding the Dow.

When asked if the Dow would be higher a year from now, a large percentage of investors said yes. Institutional folks were more bullish than individuals, but both report being very optimistic.

But then the survey goes a step further and asks investors for their assessment about whether stocks are overvalued or cheap. As you see in the chart below, investors are bullish about stock prices while having low confidence in the valuation of stocks. While not necessarily bearish by itself, it does seem contradictory that otherwise bullish investors tend to think the prices they're paying might be a little high.

The implication here is the so-called "greater fool theory" could start setting in and inflate a stock bubble. How the theory works is that investors can become more bullish as prices get higher, regardless of the value they're investing in because they think they could always sell for more to someone else (the fool, in this case). They're willing to pay $40 for something worth $1 because they hope to sell it later for $60, $80, you name it. Sound familiar? This is just what many investors did with tech stocks in the late-90's and the Dutch did with tulip bulbs in the early 1600's. People never learn. While we're not even close to valuation levels seen during the Tech Bubble, this phenomenon is something to pay attention to.

So, while there seems to be a disconnect between the survey data, it does illustrate the point that investors remain confused about short term stock performance versus longer term value. This should emphasize the importance of balance, diversification, and having a disciplined investment process to guide you. Just think of the interesting headlines in the past year. China, Brexit, our election, North Korea, the French election? Would you want to try to trade your way around all of that? The smart answer is No. 

Have questions? Ask me. I can help.

http://www.aaii.com/p/sentimentsurvey

https://www.bespokepremium.com/