Spokane Journal of Business

National sentiment remains bearish despite positives

Stock market highs don’t necessarily foretell doom

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The S&P is close to all-time highs, and yet, the broad national sentiment remains very bearish. 

Over the past seven and some years, periodic surveys have shown the majority of people in this country have continued to feel that another recession was close at hand. During this same period of time, the financial media has been filled, seemingly daily, with many sources suggesting that this will end badly. This has continued in spite of the actual market results over this time. Nonetheless, I guess it’s not surprising that these words are actually given any serious consideration. Here’s why I say that.

In no particular order, here are some recent comments and notes that have been made that seem to help reinforce this aura of ongoing uncertainty. For instance, Goldman Sachs recently cut its three-month rating on stocks to underweight. UBS reported that its survey of wealthy investors showed that they’re holding record levels of cash. The American Association of Individual Investors Sentiment Survey has only twice been above 30 percent bullish since last November. 

According to Bank of America Merrill Lynch, even professional fund managers have cash levels at the highest amounts since November of 2001. Other signs of worry include gold’s increase this year and investors’ willingness to actually, on purpose, put money into bonds with negative rates. And the “best” one came from Jeffrey Gundlach, the bond guru and chief exec at DoubleLine Capital, who announced that investors have entered a world of “uber complacency” and that we should “sell the house, sell the car, sell the kids … nothing here looks good.” 

Another view

The fact that we’ve set new highs is mostly trivia; there’s nothing particularly special about reaching a specific index level. The rise simply represents stocks’ tendency to trade higher over time. It’s normal for valuations to expand as bull markets mature, so being slightly above their long-term averages doesn’t mean stocks have risen too quickly and are due to fall back a bit. Markets don’t follow clocks, calendars, or the pronouncements of pundits.

Quite the contrary. According to Ari Wald, technical market strategist at Oppenheimer, in a study going back to the 1950s, every time the S&P 500 has reached a new all-time high after being below its prior high for at least a year, which we were, the next 12 months are up an average of 14 percent. It’s been positive 12 out of 13 times since 1950 when that situation arose. Please keep in mind that past performance won’t necessarily be repeated in the future.

Our economic drivers, like corporate earnings and global growth in general, are positive and underappreciated. The fact these recent new highs are seen as warning signs shows investors are far from euphoric. People see bubbles everywhere, not realizing bubble talk is self-deflating. Though short-term pullbacks are always possible, I believe this bull has the potential to keep trudging higher overall.

I’m on record as saying that I think we remain in the secular, as opposed to tactical, bull market that began in March of 2009, and I think it has the potential to continue. Matter of fact, in addition to being long lived, Wikipedia tells us that a secular bull market consists of larger bull markets and smaller bear markets over its entire existence, which doesn’t mean straight up.

According to Jeff Saut at Raymond James, secular bull markets historically have tended to last 14 to 15 years and compound at 16 percent per year, on average. Since 1929, there have been just two secular bull markets: 1949 to 1966 and 1982 to 2000. 

It’s impossible to predict market-changing events ahead of time. Even the most plugged-in experts often don’t see them coming. And when they do occur, it’s equally as impossible to know how the market is going to react. The reality is that there have always been and will be problems in the world, and they aren’t going to be going away any time soon. For those reasons, it’s important to separate the emotional responses you feel about current events from the decisions related to your portfolio—to do otherwise can prove quite expensive.

While no one can predict what the markets will do, you can prepare for what actions you will or won’t take during various market scenarios. Having a heavy concentration of your assets into any one sector—cash, stocks, bonds, real estate, gold—is not investing. It’s speculating. Given the market so far, your portfolio values could be looking pretty good these days. 

This is the time when you need to make sure you know what you’ll do if something doesn’t go as planned—a sort-of life boat drill. You never want to get yourself into a situation where you’re trying to figure out what to do on the fly when prices are moving quickly and your emotions are running high.

Based on my experience, when I hear talk like Gundlach’s call to “sell everything,” I have to wonder. Over 40-plus years in this business, I’ve never seen that work as a strategy—if, indeed, that’s the right word for it. 

Let’s consider some non-emotional facts. 

According to the folks at Investopedia, when debt issues like longer-term bonds have a lower yield or rate of interest than short-term debt issues of the same credit quality, we have what’s termed an inverted yield curve. Normally, longer-term issues will pay more due to the length of time your money is committed. This type of yield curve is considered to be a predictor of economic recession. 

Right now, the yield curve isn’t inverted and investor sentiment is cautious rather than euphoric. Those conditions would ordinarily be in place just before a bear market begins. Moreover, our fundamental economic background remains pretty good. Consumer spending continues strong, with real retail sales continuing up strongly since 2011. Housing remains also a positive. Corporate profits continue at record levels.

Byron Wien, of BlackStone, reminded us in a recent note that investors should be encouraged by the index of leading economic indicators. This forward-looking index, with lead times of one to two years, had hit peaks prior to the recessions of 2001 and 2008-09. Today, this index is still edging higher and hasn’t reached a definitive peak. 

In my opinion, the significant factor signaling the underlying health of an economy is corporate profits or losses. An economy creating profits such as ours is doing is growing. And, based upon the recently released second-quarter earnings, I believe we’ll see a much more positive and more broadly focused outlook in the months ahead. 

Stay calm, carry on, and enjoy the last bits of summer. 

As always, please keep in mind that this article represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events. This information is for educational purposes only, and shouldn’t be relied upon by the reader as research or investment advice.

The S&P 500 index returns discussed are for illustrative purposes only and don’t represent actual investment performance. Indexes are unmanaged and one cannot invest directly in an index. And again, past performance doesn’t guarantee future results.



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. Securities and Investment Advisory Services offered through KMS Financial Services, Inc.

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