It had been a long Bear market in stocks, when in August 1982 the major equity markets started to go up most days. By mid-August 1982, the market was on a roll. My first really significant client was confused, as he was short the market (positioned to profit if the market continued to fall) through his primary and more senior Merrill Lynch broker. As a 28-year-old, what I lacked in wisdom was made up in confidence. "It could be the start of better markets...simply due to everyone being so pessimistic", I remarked to my significantly older client. As luck would have it the stock markets continued to rally until 1987.
LOG scale. Price return only. Dividends, fees and taxes not included. S&P 500 from 1982 to 2023
My ability to predict is no better or worse than fellow investors. But we can look back at history and see that stock markets go up in value roughly 75% of the time. One concludes that it pays to stay invested. Common sense though can be a rare commodity (it makes sense that stocks appreciate over time as the economy grows, corporate earnings increase, translating into higher stock prices). The difficulty with this relationship of earnings to valuations is that it is irregular and occurs only over longer time periods.
Why are investors (both professional and amateur) currently filled with doom and gloom? I think it might be a COVID hangover. COVID and lockdowns shook up our notion of normal. Perhaps it is difficult accepting that the world has always been fraught with risk and in spite of this, stock markets have gone up over time. Today there is constant chatter about war, random violence, and polarization. Great reasons, it seems, to remain bearish and on the sidelines.
But is the world really a more dangerous place relative to the past? I think of the Vietnam War when I was a Canadian teenager. Unlike my American counterparts, I had no fear of being drafted, yet we stayed up at night worried on their behalf. The civil rights movement was terribly violent. Political discord came to the forefront with the Democratic National Convention in Chicago. The world has always been violent and unsettled.
In spite of my aversion to predicting the future of equity markets, I thought the 2020 damage to the economy, due to COVID, would be disastrous for the stock markets. Well-known analysts predicted that the S&P earnings would drop from $200 to $100 by year-end. How could the markets possibly hold up? Would this be the one time that investors should absolutely reduce their equity holdings? (regrettably, I thought so at the time).
Well S&P 500, earnings did not fall to $100. Interest rates were reduced to inflate the system, governments back-stopped bonds and threw trillions of dollars at their citizens. The major equity markets fell sharply from late February 2020 to late March 2020 (possibly the shortest Bear market of all time?). By August 2020 the S&P 500 had shockingly reached a new high. This global pandemic which seemed likely to result in a disastrous financial outcome was quickly ignored by the stock market. Cash on the sidelines never had much of a chance to reinvest at lower levels.
Adding to the COVID hangover was the year 2022. Stocks entered a Bear market as did bonds (correlated to a degree no investor had experienced since 1938). By one measure 2022 volatility was higher than any year since 1945 for the S&P 500.
Just when we thought we were out of the woods! No wonder investors are nervous. Do you really want to invest in stocks and bonds when the world is full of peril or wait until "the easy money" opportunity is made available? (a phrase I always disliked as it only looks easy in hindsight).
According to Bloomberg (March 31, 2023), U.S. investors have...........
the lowest allocation to U.S. stocks in almost two decades
have kept cash holdings high for the longest period since the years 2000-2002
Are focused on recession trades more than any time since 2000
Goldman Sachs reports that hedge funds have close to five-year lows of net equity exposure.
Against this Bearish positioning......
The NASDAQ is in a Bull market, up over 20% from its 2022 low.
The S&P 500 has rallied for two quarters in a row. This level of momentum is unusual, last seen in 1981.
The risks to the economy of higher interest rates and bank failures are well-known by investors. The markets usually hurt investors from unidentified issues (Rumsfeld's unknown-unknowns).
One never knows where and when returns will come to us. In my mind, it does feel a little like August 1982, as investors ask "Why is the market going up most days?"
regards, Tim
Tim Morton, CFA is a retired portfolio manager with 45 years of experience working with private clients and is the editor of mortonir.com and a contributor to Barron's. My comments are not to be taken as investment recommendations. They are purely for discussion purposes. Please see your registered advisor for investment advice.
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