Good News, Bad News

If nothing else, recent market volatility confirms what we should know all the time but tend to forget: being a long-term investor is never easy for long. We’ll have bouts of calm when prices only seem to rise amid low volatility and investors are happy and feel assured that the good times will last forever. And then wham, the tide turns, and it seems as if everything that was positive is now negative and the sky falls a little more each day. It’s human psychology meeting fast-moving markets and the whipsawing from positive to negative sentiment has only gotten more pronounced lately.

Case in point is the recent survey from the American Association of Individual Investors (AAII). There are a variety of sentiment surveys out there, but AAII’s is watched closely because it’s members are primarily regular people (not investment professionals) trying to manage their own portfolios with educational help from the organization. They’re surveyed weekly to see how bullish, bearish, or neutral they are, and where they see the markets six months out. It’s a here-and-now sort of survey and a good way to check the mood of individual investors. Survey history goes back to the late 80’s. The results are interesting because, so far as the “pros” look at it, spikes in the survey results are seen as a contrarian indicator to buy or sell. (Recall how the professional side of the markets refers to ordinary mortals as the dumb money while the pros, of course, are the smart money – sort of rude and condescending, yes, but generally accurate from a historical perspective.)

Last week AAII members reported being incredibly bearish, as shown in the charts below from Bespoke Investment Group and AAII. This was the lowest survey result since the March 2009 market lows of the Great Financial Crisis. The stock market was performing much, much worse back then, and there was real risk of the economy, and even the global financial system, coming apart at the seams. Yes, our current situation is different, but I still scratch my head a bit looking at a chart like this. As I’ve mentioned before, one explanation for this sort of bearishness showing up now could be the cumulative weight of recent events capping off the last couple of years, leading many to the point of mental exhaustion. So it’s understandable that lots of investors are in full-blown crisis mode. If so, I get it. I feel it myself some days.

Investor mood is especially important right now because we have the Fed meeting this week to announce its next move on short-term interest rates. As we discussed last week, investors are expecting a half-point rate bump, and this (plus more increases in the coming months) is already priced into bonds and stocks. The benchmark 10yr Treasury hit 3% yesterday for the first time in several years and parts of the yield curve are toying with inversion.

And now the Fed will be making its rate decision on the heels of the official estimate of GDP for the first quarter showing a contraction. (I italicized here because GDP estimates get revised several times in the months following their initial release – they’re imprecise but still move markets.) It was a good news, bad news kind of report. Some aspects of the GDP numbers were positive while others were negative, such as inventory and trade sectors, issues still emanating from pandemic-related shutdowns and intense government spending. How the Fed reconciles all this with 40-year-high inflation and reeling financial markets, and how they couch their decision this week, will all be important to watch.

So are almost 60% of AAII members right that stock prices will be lower in six months? Or is their extreme bearishness overdone and a sign of better times to come, a “dumb money indicator” that the pros love to crow about? Only time will tell, but if past is prologue we could (hopefully) soon be seeing the lows for this correction.

If so, it doesn’t necessarily mean the low was last Friday, or that it won’t be tomorrow or weeks from now, just that as more investors reach the point of ultimate capitulation, we’ll get closer to a bottom as willing buyers step in. We saw this in the last hour or so of trading yesterday when the institutional algorithms started buying and turned a downer of a day into a positive close. This should serve as a reminder that there are still lots of buyers out there looking to take advantage of sellers, and that’s the way markets are supposed to work.

Here's a link to the AAII survey site if you’d like to check that out.

https://www.aaii.com/sentimentsurvey

And here’s a link to Bespoke’s site if you’d like to poke around there as well. I’m an “institutional” subscriber but you can read their blog and follow them on the socials for free. Their analysis, while definitely geared toward professionals, is exceptional.

https://www.bespokepremium.com/

Have questions? Ask me. I can help.