Spokane Journal of Business

Fear of the unknown dominates investment market

Concerns abound despite long-running bull market

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In May of 2015, the S&P 500 made its most recent all-time high. At that time, it seemed as if there was nothing that could stop what CNN Money says has now become the second-longest bull market in history. 

And yet, nervous market participants today continue to pull money off the stock market table and head for cover in the form of assets they view as “less risky.” That is evidenced by the continued, substantial inflows to bond funds and other income-oriented funds like utility funds, real estate investment trust funds, preferred stock funds, and low-volatility stock funds.

According to Bank of America Merrill Lynch, the big-money institutional investors, such as mutual funds, endowments, hedge funds, and private clients, have been selling stocks as well. In a recent report, the company said that this has been the longest uninterrupted selling streak by those types of clients in their data history going back to 2008. It added that, “Persistent sales suggest clients have continued to doubt the rally’s sustainability.”

In the 13 months since the high, we’ve had a couple drawdowns of more than 11 percent, followed by short, sharp comebacks that have brought us back to where we are now. In total, we’ve had about 21 months of basically sideways markets with ongoing signs of market fear everywhere—from the deep-pocketed hedge funders to us regular folks.

An example of that was shown late last month when Goldman Sachs downgraded its outlook on equities to “neutral” for the next 12 months. The firm said, “Until we see sustained signals of growth recovery, we do not feel comfortable taking stock market risk.” That borders on heretical thought, when coming from an old-line firm like those folks. 

This wide-ranging angst is all somewhat reminiscent of August of 1985, when Business Week published its (in)famous cover story proclaiming, “The Death of Equities.” The Dow was at about 800 when that was published. In July 2012, Time (magazine) chimed in when its story had it that “Stocks are dead – and bonds are deader.” The Dow at that point was at about 12,900. Seems to me that Mark Twain’s comment that, “The reports of my death are greatly exaggerated” is historically more applicable to the markets.

Many investors still believe in their hearts that we haven’t seen the stock market low. They can’t understand how the stock market can make a real bottom before resolving the problems and challenges that are out there.

There will always be fears and uncertainties affecting the markets, just as they have in the past. Today, it’s about the fear of the unknown—the fear out there is that there is another shoe to drop somewhere down the road. 

The coming challenge for many is that the longer we go without passing and advancing nicely past the old high, the less likely it is that they’ll be able to sit tight and deal with it. Sitting isn’t easy when there doesn’t seem to be any money being made for a prolonged period of time. Investors forget that what usually works doesn’t work all the time. They’re obsessed with finding a strategy that’s working right now. “I don’t care what it costs, anything but this” seems to be their driver. 

Today’s overall picture goes beyond valuation and into a general worry that the market is missing something. Trying to predict what the market is going to do based on valuations is sort of a sucker’s game. Markets don’t drop precipitously because they’re overvalued; markets drop precipitously because some unforeseeable external event happens.

The markets historically price known bad news into the market’s values.

For example, U.S. Treasury notes and bonds are considered universally to be the safest of all notes and bonds, given the guarantee of the U.S. government. As of earlier this month, the 10-year U.S. Treasury note was yielding a mere 1.7 percent, which is only a fraction higher than the all-time low of 1.4 percent registered about four years ago. That’s another way of saying that the price of those bonds is close to an all-time high—or overvalued. Due to fear and uncertainty in the global markets, people worldwide are willing to pay top dollar for the safety of those bonds, relative to other bonds. 

Research firm Cornerstone Macro recently said it best: “It’s not often that you can say that oil prices are up over 30 percent year to date—and investors are worried about deflation. It’s not often you can say that the market is (close to) an all-time high, yet investors are worried about growth. It’s not often you can say ‘risk-on’ is working and yet bullish sentiment is sitting near all-time lows.” Clearly, there is a disconnect between the data and investor attitudes.  

One reason for the ongoing disconnect might have been identified by hedge fund manager Paul Singer, who says, “What is surprising is that even the most sophisticated investors, traders, and commentators continue to rely on predictions issued by those who have no record of success at such forecasts.”

Market participants tend to exaggerate the negatives and dismiss the positives. 

Excess cash sitting idly earning next to nothing in checking, savings, certificates of deposits, or in traditional low-yielding bonds only is going to be subject to the erosion of inflation as your savings get eaten away over time. In the short run, stock prices will always move up and down based on frightening, but often insignificant, headlines. In the long run, the more important issues are determining how you’re going to reach your retirement goals, whether you are going to outlive your savings, and your personal willingness to take the risks associated with investing in the market. 

That requires you to assess properly your time horizon, risk tolerance, income needs, tax situation, estate plan, and other uniquely personal circumstances. Your key personal financial planning factors are dependent upon a strategy that includes a properly diversified asset allocation that is periodically rebalanced to remain consistent with your goals … and, key to it all, staying with it.


Michael Maehl is a financial adviser and Spokane-based senior vice president of Opus 111 Group LLC, a Seattle-based financial services company. He can be reached at 509.747.3323.

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