For many years it has been difficult to remain bullish. We have faced political uncertainty, deficit and debt concerns, meteoric valuations as well as trade and tariff wars. Throw in a 35% market decline on the heels of Covid and one may actually ponder the sanity of remaining invested at all. Over these years I’ve had countless conversations with folks as we emerged from the 2008 / 2009 financial crisis, regarding my bullish view, staying firm, while countless others sat on the sidelines.
While there were numerous fundamental data points that helped me remain positive on stocks, one variable stood out from all others that gave me great confidence with my conviction. Everyone I spoke to was concerned, nervous or downright bearish. While not always a contrarian, this qualitative factor has helped me to stay the course even during one of the most rapid declines since the 1987 market crash.
This qualitative variable however is changing and changing quickly.
If you were a fly on the wall in my office over the last several years you would have heard conversations which went something like this.
“Quint I’ve read…
…if Hillary wins the market will crash.
…if Trump wins the market will crash.
…if the trade war continues the market will crash.
…if the tariffs continue the market will crash.
…the Dow is back above 10k, should we sell?
…the Dow is back above 20k, should we sell?
…if Trump wins, the market will crash.
…if Biden wins, the market will crash.
…if the Democrats sweep congress, the market will crash.
…there is no coming back from Covid.
…it’s only a matter of time before the Debt matters
…Inflation is going to crush the market
My response has always been the same.
“One thing keeping me positive, is just how much negativity there is.”
Now, one thing to understand is this alone has not kept us in stocks. In fact, general market sentiment is a difficult short-to-intermediate term indicator; however, at extremes it can be very helpful. For example, while I may feel many are negative, we may read about wild speculation in asset classes such as Bitcoin or Meme Stocks. Gauging broad sentiment is more of an art than a science.
Furthermore, one of the biggest variables pushing stocks has been the liquidity provided by the Fed and the corresponding interest rates. For a return on capital, there simply has been no other option other than stocks.
While little has changed regarding the Fed or interest rates, within our office I am beginning to field a question I haven’t heard in years, actually in over a decade.
“Should we take more risk?”
It’s a simple question really and one that may be prudent considering a diversified asset allocated portfolio including areas such as gold, international and emerging markets has been outpaced by the S&P 500. In addition, if bonds are yielding little to nothing, wouldn’t it make more sense to add more stocks for the time being?
While this new question may seem harmless, the psychology to me, speaks volumes.
Markets work in cycles and generally tend to correlate with investor psychology. Tops always come when the mood is the most positive and investors are the most bullish. Bottoms transpire when investors want nothing to do with stocks and value is so prevalent you can’t give an equity away.
It’s important to know that this shift in sentiment I’m seeing does not mean I’m automatically taking the other side and heading for the hills. My belief is that if this conversation is happening in our office, it mirrors conversations happening all around the US. It may even mirror what millions of Americans are thinking or doing in their self-directed 401(k)s.
This demand for stocks may in fact keep markets elevated for some time; however, make no mistake that unless there is an endless supply of investor capital, this demand is not something that I see lasting forever.
I bring this to your attention so that you may better understand how I evaluate markets. Other than this shift in sentiment, there is nothing suggesting a top or dramatic reversal is upon us. We’re going to slowly emerge from this second round of Covid, supply chains will eventually come back online, the labor force should return, the economy should continue to improve, global manufacturing is coming back online and yes, the dreaded core inflation will help keep asset prices, including stocks, elevated for some time. In fact, there are so many positives right now, it feels crazy to think of becoming cautious.
By now you know I form my opinions on markets based on my own homework, experience, and due diligence. I must lay my head on my pillow each night with confidence I have made wise decisions for not only my family’s personal capital but the hundreds of families who have entrusted us to help them with their capital as well.
Despite the countless positives pushing stocks, we are slowly beginning to reduce equity exposure through a systematic rebalance for our passive allocation models. We will proceed with this very slowly and in small increments, adjusting as we see needed. Should the markets continue to rise and the feverish buying continue, I suspect we will continue to reduce equity exposure and reduce risk. While we’re certainly not looking to time any market top, our goal is to slowly take advantage of these price levels and patiently wait for better opportunities. Of course, we may be early in our caution. Thankfully, I’m ok with this and care not what others think.
Since our readership extends far beyond our clients alone, my suggestion for those who do not have assets under our care is to review your own allocation, understand your goals and ensure your risk aligns with your long-term objectives. If you’re not having these conversations with your advisor, maybe consider a change and give us a ring.