Individual Investor Bullish Sentiment Surprisingly Not So Low

One factor we track on a periodic basis falls into the investor sentiment category. There are a number of sentiment measures one can evaluate on the institutional and individual investor level. The one that is weighing on our minds currently is the fact the individual investor bullish sentiment level has not reached a level one would expect in a market like the recent one. When the S&P 500 Index is down 33.9% in 23 trading days, I would expect individual investors to become extremely bearish on equities, at least that has been the case historically.

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Market Volatility May Create Opportunity

My blogging has been rather light the past few weeks as most of my effort has been focused on our clients' and reaching out to them during these uncertain times. I mostly write blog articles during the evenings and on the weekends and my wife has been hearing me say, "I want to get a blog post done."  So much to write about, but so much going on. With Ohio continuing under a 'stay at home' order, I am writing today.

The government's mandated shutdown that is in place in an effort to slow the spread of the COVID-19 virus has created an unusual economic and market environment.  Our firm's leadership, marketing, technology and human resource staff, have done yeoman's work on assisting in our client communication efforts. Our dedicated website landing page on the COVID-19 topic is just a small example of everyone's effort.

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One-Stop COVID-19 Resource Center

Blogging has been light given the fluid and volatile market environment resulting from the ongoing COVID-19 virus situation. Our firm continues to reach out to clients to provide insight and information they need during this unusual time. An outcome of our communication with clients and HORAN's broad reach across health care, investments, insurance and business in general, the firm has established a dedicated COVID-19 Resource web page with the assistance of our marketing group. Some of the site's dedicated page provides information for:

• HR professionals, e.g., answers to FMLA questions,
• business information, e.g., link to the SBA Disaster Assistance Loan website,
• answers to retirement planning questions and periodic market and financial updates, and much more.

Check out the site. If we can provide answers to any other question, do not hesitate to let us know.

Are We There Yet?

Some are equating the current market decline to the equity market decline that occurred in October 1987. Urban Carmel, who writes at The Fat Pitch highlighted in commentary on Twitter, the market's action in 1987:

• "the S&P 500 Index fell 20% in one day, rose 15% the next 2 days, then returned to the low the following week."

• "then rose 15% again and retested the original low 6 weeks later,"

• "and finally the S&P 500 Index was up 25% a year later and back at prior highs 2 years later."

So what does that look like compared to today's market and has it arrived at a bottom? 

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An Extreme Level Of Equity Market Fear

Can fear measures get to a level more extreme than today? They did during the great financial crisis (GFC), but we do not think the current environment is like the 2008/2009 market period. Near the equity market open this morning trading was halted for 15 minutes as the equity market circuit breaker was triggered with a 7% market decline. Then investors had to contend with a near 25% drop in oil prices due to Saudi Arabia and Russia disagreeing on oil production levels. For consumers though, lower oil prices should translate to lower gas prices at the pump, a bit of a silver lining.

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Coronavirus: Panic Leads To Pessimism

Don't get on an airplane, don't get on a train, don't get on a cruise ship, stock up on food and necessities, but don't go to public places where there might be crowds. The world is ending. The reaction to the coronavirus, SARS-CoV-2, outbreak appears to have moved into a panic over the situation. So one might ask why an investment person like myself is writing about this outbreak. The reason is my belief this is an unnecessary overreaction that is impacting the investment portfolio of institutions and individuals. The near cartoon places my thoughts in the proper perspective though.

I have written several recent posts on the extreme level of fearful investor sentiment, here and here. Reviewing the economic data to date suggests an environment where investors should be anything be fearful of the future. Jeff Miller, Ph.D. writes a weekly article that highlights recent economic data and expectations for the week ahead. In this week's article, Weighing the Week Ahead: Why it is Crucial to Use the Right Time Frame, he discusses some of the recent economic data and more. So why is fear driving the narrative. One author who seems to have an uncanny ability to put thoughts succinctly into perspective is Morgan Housel. His article from 2017, The Seduction of Pessimism, is a worthwhile read given the narrative around the recent virus outbreak. One comment that jumped out to me in his article is,

"We don’t just respond faster to pessimism. We coddle it for longer than is necessary. Optimism demands facts and is ditched at the first sign of trouble. Pessimism can be grown from a crazy thought and clutched indefinitely."

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Broadening Fear Means Increasing Potential For V-Shape Market Recovery

A widening fear level across many sentiment measures increases the likelihood of a strong market bounce. I will not rehash the panic narrative I wrote about last weekend, but sentiment measures are becoming increasingly bearish.

• NAAIM Exposure Index: The NAAIM Exposure Index was reported at 29.03% this week, a 36 percentage point decline from the week earlier. The NAAIM Exposure Index consists of a weekly survey of NAAIM member firms who are active money managers and provide a number which represents their overall equity exposure at the market close on a specific day of the week, currently Wednesday. Responses are tallied and averaged to provide the average long (or short) position or all NAAIM managers as a group. Institutional money managers have equity allocations at a level lower than the December 2018 market decline and near levels reached in the weak market of 2015/2016.

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Market Decline Driven By A Panic Narrative

If there is one factor most disappointing about the coronavirus (COVID-19) outbreak, it is the panic narrative that seems to have overtaken a more rational narrative. This panic narrative is certainly contributing to the negative equity market reaction. In a tongue and cheek Saturday MarketWatch comment by Tom Lee, founder of Fundstrat Global Advisors, he notes one of the factors impacting the market may be investor concern of, "A meteor or alien invasion to end global existence has been spotted but its arrival is unknown (or a virus pandemic.)"

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Equity Market Sentiment Moving To An 'Extreme Fear' Level

The coronavirus, Covid-19, has triggered the recent decline in the equity market, specifically the S&P 500 Index. The Index is down 8.3% from its February 18 high with six percentage points of the decline occurring in the last two days. In spite of the recent weakness, the S&P 500 Index remains up 17% since the beginning of 2018. Within the S&P 500 Index though, more than 125 stocks are down more the 25% from their 52-week high, potentially providing some individual stock opportunities for investors.

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Current Market Similar To 1950's & 1980's Bull Market

I have noted in earlier posts beginning in 2016 (here and here) that the current equity market track resembles the bull market of the 1950's and 1980's. Those earlier articles noted policy similarities currently in place similar to policies pursed in those earlier decades, like tax cuts, infrastructure spending and more. As the below chart shows, the bull market that began in 2013 is tracking closely to that of the 1980's and projected to meet the 1950's & 1980's markets in a year or so.

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Simply Too Much Brick And Mortar Retail Space

As I often note when commenting about consumer related data, the consumer is important due to the fact they account for 70% of economic activity in the U.S. With the current economic cycle the longest on record, the consumer continues to show strength and remain in good financial shape. And given a strong consumer it may seem surprising that retail bankruptcies continue at a pretty high pace. Earlier this week Pier 1 Imports (PIRRQ) filed for bankruptcy and this will likely not be the last retailer to face financial headwinds. The following link from CB Insights Research Briefs details 81 retail bankruptcies since 2015.

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