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
It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
5 Responses to “The ‘Unloved’ Stock Market – An Article of Fund Manager Faith”
Most read in the last 20 days:
- A Striking Chart
The Economy and the Stock Market As long time readers know, we are always paying close attention to the manufacturing sector, which is far more important to the US economy than is generally believed. In terms of gross output it is the largest sector of the economy, and it should of course be obvious that saving, investment and production are the only ways to create wealth. What's left of the Brooklyn Domino Sugar Refinery. Photo credit: Paul Raphaelson Contrary...
- Trump and Putin Narrowly Escape Assassination Attempt
The Gloves are Coming Off First a little bit of recent history. Readers are probably aware that some questions about the occasionally malfunctioning Deep State android... no, wait, we'll start again. Questions have recently been raised about the health of presidential candidate Hillary Clinton by various “alt-right” tinfoil hat-wearing conspiracy theorists, such as this one. The monsters are normally hiding under Hillary's bed, but lately they have come out into the open...
- US Economy - Curious Pattern in ISM Readings
Head Fake Theory Confirmed? This is a brief update on our last overview of economic data. Although we briefly discussed employment as well, the overview was as usual mainly focused on manufacturing, which is the largest sector of the economy by gross output. Pepsi factory in Baltimore, 1956 Photo via pinterest.com Readers may recall that we have pointed out for some time that there was quite a large gap between the data reported in regional Fed manufacturing...
- A Convocation of Interventionists, Part 2
Pleas for More Deficit Spending We continue with our Jackson Hole post mortem – including remarks that were made by economists and monetary bureaucrats shortly before and after the pow-wow and seem to be connected to the discussions there. Assembled central planners (we're not sure if this picture was taken at the conference, but most of the people in it were there). Photo credit: Getty Images We should preface the following with a Mises quote, as the...
- Why the Fed Destroyed the Market Economy
What Have You Done for Me Lately? Swing voters are a fickle bunch. One election they vote Democrat. The next they vote Republican. For they have no particular ideology or political philosophy to base their judgment upon. The primacy of the wallet. They don’t give a rip about questions of small government or big government. Nor do they have any druthers about the welfare or warfare state. In effect, they really don’t care. What’s important to the...
- How is Real Wealth Created?
An Abrupt Drop Let’s turn back to our regular beat: the U.S. economy and its capital markets. We’ve been warning that the Fed would never make any substantial increase to interest rates. Not willingly, at least. Groping in the dark, Yellen-style Each time Fed chief Janet Yellen opens her mouth, out comes a hint that more rate hikes might be coming. But each time, it turns out that the economy is not as robust as she had believed... and that a rate hike isn’t...
- Janet Yellen’s Shame
Playing Politics In honest capitalism, you do what you can to get other people to voluntarily give you money. This usually involves providing goods or services they think are worth the price. You may get a little wild and crazy from time to time, but you are always called to order by your customers. In the market economy, consumers reign supreme. There is no such thing as a “lost” vote in the marketplace; every penny spent affects production. Mises noted: “Consumers...
- Get Ready for a New Crisis – in Corporate Debt
Imposter Dollar OUZILLY, France – We’re going back to basics here at the Diary. We’re getting everyone on the same page... learning together... connecting the dots... trying to figure out what is going on. The new three dollar bill issued by the Apprehensive States of America. We made a breakthrough when we identified the source of so many of today’s bizarre and grotesque trends. It’s the money – the new post-1971 dollar. This new dollar is green. You...
- A Convocation of Interventionists – Part 1
Modern Economics - It's All About Central Planning We are hereby delivering a somewhat belated comment on the meeting of monetary central planners and their courtier economists at Jackson Hole. Luckily timing is not really an issue in this context. Central bank headquarters: the Fed's Eccles building, the ECB's hideously expensive new tower in Frankfurt, and the BOJ's Tokyo HQ (judging from the people in the foreground, it may be a source of noxious fumes). When...
- Hanjin Marooning in San Pedro Bay
Global Trade Reversal Expansions and contractions in global trade have played out over long secular trends for thousands of years. The Silk Road, for example, was established by the Han Dynasty of China in 130 BC, and allowed for continuous trade between East and West for nearly 1,600 years. In addition to economic trade, the Silk Road was also a conduit for culture and knowledge among its network of civilizations. A map of the main ancient Silk Road - click to...
- The Economy, the Stock Market and the Fed
John Hussman on Recent Developments We always look forward to John Hussman's weekly missive on the markets. Some people say that he is a “permabear”, but we don't think that is a fair characterization. He is rightly wary of the stock market's historically extremely high valuation and the loose monetary policy driving the surge in asset prices. The S&P 500 Index and the NYSE advance-decline line. Most market internals weakened steadily until early February 2016, but...
- John Maynard Keynes’ General Theory Eighty Years Later
The “Scientific” Fig Leaf for Statism and Interventionism To the economic and political detriment of the Western world and those economies beyond which have adopted its precepts, 2016 marks the eightieth anniversary of the publication of one of, if not, the most influential economics books ever penned, John Maynard Keynes’ The General Theory of Employment, Interest and Money. The mere fact that the book is lauded by TIME magazine on the cover should give everyone...