Do People Really 'Hate' Stocks These Days?
Yesterday we came across an article at Bloomberg entitled „ “. Naturally that piqued our interest, as sentimentrader's 'dumb money/smart money' spread has blown out to a rarely seen 29% as of yesterday (the 'dumb money' is 67% confident of a rally, the 'smart money' 38% confident). This spread would suggest that stocks are anything but 'unloved'.
It certainly isn't the only indicator saying so, although there are admittedly a few 'holdouts' in the sentiment arena. For instance, Wall Street strategists on average recommend 'only' 60% exposure to stocks and a mighty 6% to cash (the remainder is allocated to bonds – gold still doesn't figure in the allocation models of the paper pushers). This cash allocation is almost twice the actual cash allocation currently held by mutual fund managers. So perhaps the strategists 'hate' stocks, but the mutual fund managers love them?
Mind, the strategist allocation to stocks has been as high as 72% in the past, right around the year 2000 top. That didn't work out too well. They tried again, with in interim high of a 66% allocation to stocks right at the 2007 top. By now their clients' funds may well be exhausted. Certainly it's clear that the number of yacht owners among Wall Street's clientele must have shrunk considerably if they listened to its advice.
Meanwhile, Mark Hulbert's Nasdaq sentiment index stands at 75% (meaning that stock market timers recommend a 75% exposure to high beta tech stocks). This is a rather unique expression of 'hate'.
Oh, and the 5 day average of 'high yield', this is to say, junk debt issuance, has just reached a new record high! That's right dear readers, a record high!
The 'unloved' SPX looks a tad overbought here. The much ballyhooed 'golden cross' is often a sell signal in primary bear markets – this is not always the case, but as a 'buy signal' its value is practically zero. Statistically, the market is about as likely to go up after a golden cross than at any other time! The same goes by the way for the 'January barometer' superstition. Its predictive value is a big fat zero – click chart for better resolution.
In the above linked Bloomberg article, the following arguments are forwarded by fund managers. We believe it's a case of wishful thinking, but let us see what they actually have to say:
“The benchmark gauge for U.S. shares has climbed 6.9 percent in 2012, the most since it rose 14 percent to begin 1987, data compiled by Bloomberg show. It traded at an average of 14.1 times earnings since the start of 2011, the lowest annual valuation since 1989. More than $469 billion has been pulled from U.S. equity mutual funds over five years and New York Stock Exchange volume slipped to the lowest since 1999.
Pessimism is taking a toll on the securities industry, where more than 200,000 jobs were lost last year, even as U.S. unemployment declines as the economy accelerates. Sentiment is the worst since the early 1980s, when 17 years of equity market stagnation gave way to the biggest rally in history.
“Investors are scared to death,” Philip Orlando, the New York-based chief equity strategist at Federated Investors Inc., which oversees about $370 billion, said in a telephone interview on Feb. 3. “The fears are justified, but from a valuation standpoint the market has overshot, as it typically does. We’ve been pounding the table to put money into equities.”
All these 'scared to death' people have recorded the lowest bear percentage in six years according to the AAII survey of two weeks ago (American Association of Individual Investors).
The bullish argument – forwarded by fund managers holding the lowest amount of cash relative to stocks ever – seems to be: 'the market is cheap' and 'people have pulled a lot of money out of stock funds, so that means they are scared and are going to jump back in at any moment'.
What though if the suckers don't come back to be sold stocks at yet another top? In Japan outflows from stock mutual funds have been going on basically uninterrupted for over 20 years. In a secular bear market such outflows are not a bullish sign – on the contrary, they mean that people are in an ongoing process of diversifying their investments into other areas. The industry is going to keep losing assets and will be forced to sell some its holdings as a result. Remember, the same people always told us how bullish the massive inflows of the 1980's and 1990's were. Now they want to have it both ways: inflows are bullish and outflows are apparently bullish too.
As to valuation, in secular bear markets the average p/e ratio can fall a long way below 14 times earnings. Let us not forget, these earnings are at the historically very upper limit relative to total economic output. They will mean-revert. Meanwhile, valuations are likely to eventually fall into single digit territory. Ceteris paribus, a fall in the average p/e to a level of 7 (not unheard of, we have seen even lower levels over the past century) would lead to a 50% loss.
The article continues in a similar vein and adds an interesting tidbit of information:
“The stock market has effectively doubled since the March ’09 low, and we’re still in redemption territory for equity funds,” Liz Ann Sonders, the New York-based chief investment strategist at Charles Schwab Corp., said in a Feb. 2 phone interview. Her firm has $1.7 trillion in client assets. “That’s never happened.”
Money managers haven’t kept up with the S&P 500’s advance. Hedge funds declined 5 percent in 2011, the third year of losses since 1990, according to Chicago-based Hedge Fund Research Inc. A total of 21 percent of 525 global fund categories tracked by Morningstar Inc. topped their benchmark indexes last year, the fewest since at least 1999.”
In other words, all these bullish and hopeful fund managers have woefully underperformed a market that has net-net been going nowhere for 13 years in nominal terms (in inflation-adjusted terms it has produced a considerable loss). Maybe that is why people are pulling their money from stock mutual funds?
“The retreat leaves stocks in position to rally because so many bearish investors can be lured back to equities and the market is cheap, according to Scott Minerd, the chief investment officer of Santa Monica, California-based Guggenheim Partners LLC, which oversees more than $125 billion.
“Stocks are poised for a generational bull market, whether it starts this year, or next year, or in five years, is anybody’s call,” he said. “Even if we had a 50 percent increase in multiples, stocks would still be cheap.”
The fund manager 'slope of hope' in its full glory. Where are all those 'bearish investors' that can be 'lured back'? Regarding the market's 'cheapness', see above. As we said last week already, it is most likely a giant value trap.
The 'unloved' Nasdaq Composite. Advisors recommend a 75% long exposure to this sector at the moment – click chart for better resolution.
How Exposed Are Investors to Stocks?
From the above one might be tempted to conclude that investors are really 'underexposed' to the stock market these days. Fund redemptions have after all been going on for five years, so how much can there be left?
Yesterday we came across the following rather surprising charts at 'Wall Street Rant':
Ownership of the wold's financial assets: US investors hold nearly 42% of the stocks in the whole world – click chart for better resolution.
Does this look like US investors are 'underexposed' to stocks? The site offers another chart that shows the exposure of US households to the stock market:
The exposure of US households to stocks still amounts to 42% of their total asset allocation, by far the biggest portion of their investments, with fixed income a distant second at 20%. At the lows of the previous secular bear market this allocation to stocks had shrunk to 26%. Still a long way to go!
There is no evidence that allows us to conclusively conclude that investors will be 'lured back' into the stock market. On the contrary, the probability that a lot more selling of stocks by households is yet to come appears rather high.
Moreover, the argument that 'stocks are cheap' is not tenable if one considers the historical record of secular bear markets (they tend to 'undershoot' in terms of valuations) and the fact that corporate profit margins are at present uncommonly and likely unsustainably high.
The idea that the stock market is 'unloved' and 'cheap' mainly seems to be an article of faith of fund managers who are as over-exposed to stocks as they have ever been in all of history.
The 5 day average of junk bond issuance, via sentimentrader. Investors certainly seem not too shy about taking on major risk at the moment.
A comment to the above from IFRE.com:
“The high-yield market is starting off at a modest pace this morning as investors digest the 23 deals (30 tranches) that priced last week for US$18.746bn. This set a new weekly global record, easily surpassing the old record of US$16.5bn set the week ending May 14 of last year.”
Needless to say, 'May 14 of last year' was not exactly the most propitious time for buying stocks.
Charts by: StockCharts.com, SentimenTrader, McKinsey Global
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5 Responses to “The ‘Unloved’ Stock Market – An Article of Fund Manager Faith”
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