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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Positive Consumer And Business Sentiment Creating A Tailwind For Future Economic Activity

One area that remains favorable is the confidence of the consumer and small business owner. In this week's release of the NFIB small business Optimism Index, optimism rose 1.6 points to 104.3. The survey notes six of the ten components rose, two were unchanged and only two declined. Small business owners' sales and earnings expectations improved significantly, sales up seven points and earnings trends up five points. With respect to the consumer, Friday's University of Michigan Consumer Sentiment Index rose 1.1 points to 100.9. The report noted this level is near the expansion peak reading of 101.4 reached in March 2018. Also important, is the "Expectations Index, the main gauge of future economic conditions, rose to 92.6, also its second highest level in this long expansion."

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Declining Job Openings Occurring From A High Level

In Tuesday's release of the Job Opening and Labor Turnover Survey (JOLTS) job openings declined 364,000 to 6.4 million. This is a decline in openings from a high level of 7.6 million reached in November 2018. The blue line in the below chart represents hires in December and this line continues to trend higher at a fairly steady pace. In other words the pace of hiring has not slowed.

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S&P 500 Earnings Growth In An Uptrend

The strong return achieved by the S&P 500 Index in 2019, up 31.5%, occurred in an environment where earnings growth was nearly flat, i.e., up 1.7%. This flat rate of growth in earnings was below analyst expectations at the beginning of 2019. At that time I/B/E/S data from Refinitiv projected 2019 S&P 500 earnings to be up 7.2%. Consequently, the market's strong return in 2019 was driven almost entirely by the increase in the market's price to earnings ratio (P/E.), i.e., multiple expansion. The below chart displays the breakdown of the 2019 market return with the P/E ratio expansion noted by the blue shading on the bar chart.

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"Buy The Dip" Supported By Economic And Earnings Data

On Friday, January 31, the S&P 500 Index fell 1.77% resulting in the year to date return for the month of January equaling a negative .16%. That Friday decline meant the Index's return was down 3.22% from the year's high. One common phrase that describes investor behavior of late is "buy the dip." Last week's market action, up four days in a row until Friday's decline, is evidence that this "buy the dip" mentality remains a characteristic of the current bull market.

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New Dividend Aristocrats For 2020

Last week S&P Dow Jones Indices announced the annual rebalancing of the Dividend Aristocrats. In the rebalancing results, no companies are being removed, but S&P announced seven new additions to the Aristocrats for 2020. This brings the number of Aristocrats to 64 companies. The changes go into effect prior to the market open on February 3, 2020. As noted by S&P, "S&P 500^® Dividend Aristocrats^® measure the performance of S&P 500^® companies that have increased dividends every year for the last 25 consecutive years. The Index treats each constituent as a distinct investment opportunity without regard to its size by equally weighting each company."

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Investor Sentiment Is Mixed But Trending More Bullish

The American Association of Individual Investors' Sentiment Survey release this week showed a continued trend towards more bullishness by individual investors. Bullish sentiment rose 3.8 percentage points to 45.6% and this is up from a low 21.4% in October of last year.

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Investing In An Elevated Market

Two years ago to the day on January 20, 2018 I wrote a post, Will The Stock Market Ever Decline Again?, and it seems in January 2020, investors are faced with the same question. Written commentary today is mirroring commentary of two years ago as January's market has gotten off to a strong start just like in 2018. Historically, strong starts to a January are a positive predictor for market returns in the balance of the year. That was not the case in 2018 as that year was a down year for the S&P 500 Index.

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Small Business Doing Its Part To Sustain Economic Growth

In August 2018 the NFIB Small Business Optimism Index hit a high of 108.8. Since then the NFIB Index has declined to 102.7 as reported in the December NFIB Small Business Optimism report today. In January 2018 though, the NFIB Index level was 101.2 and today's reading shows an improving trend. Noted in the December report was the fact "an increased number of small business owners reported better business conditions and expect higher nominal sales in the next three months. While frequency of plans to raise compensation fell 2 points, it remains one of the highest readings in the survey’s 46-year history. Small businesses continued to hire and create new jobs with actual job creation matching November’s reading, the highest since May."

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Winter 2019 Investor Letter: A Recovery And New Decade

In the fourth quarter of 2019 the S&P 500 Index rose nearly 10% in contrast to 2018 where the Index was down 13.5%. What a difference a year can make. Our Winter 2019 Investor Letter looks at the Decade of 2000's versus the Decade of 2010's and certainly the most recently completed one was rewarding to investors. As the new year and decade unfold the market will grapple with headlines associated with Brexit, the ongoing trade and tariff situation, Central Banks around the world easing again and additional conflict in the Middle East. The market won't move higher in a straight line, but the market's bias over time is one where it does trend higher. Climbing a "Wall of Worry" may be the result in the coming year. Since the decade of the 1980's, only the decade of 2000's saw multiple calendar year declines. The 1980's, 1990's and 2010's each only saw one down year out of ten. So in those thirty years, the market was down in only three of the years.

More insight on our views are covered in the Investor Letter accessible at the below link.

• Winter 2019 Investor Letter