December 19, 2018
Bull Markets are born on pessimism, they grow on skepticism, they mature on optimism and they die on euphoria
Sir John Templeton
While nobody can know where the market is headed in the short run, I learned long ago that to get a sense of the highest probability of where markets are headed in the intermediate term, studying recent market movements, market and economic trends, geopolitical and other current events is virtually useless.
I have found that the only relevant “tell” comes from studying the trends and movements of market participants — investors!
Lipper — one of the leading firms that evaluates mutual funds and investor fund flows into and out of such funds — has been tracking weekly mutual fund flows since 1992. They revealed two very significant data points for the week ending Wednesday, December 12:
1. Investors liquidated $46.2 billion from equity mutual funds — the most ever recorded since tracking began over a quarter of a century ago! This figure is nearly 2 times the previously identified record.
2. Money market funds (the only funds that were the recipients of net new money) attracted $81.2 billion in net new assets. Also a record since tracking began over a quarter of a quarter century ago!
These historically high levels of investor pessimism were confirmed by the American Association of Individual Investors’ (AAII) weekly sentiment survey (for the week ended 11/12/18) showing investor bullishness (belief that markets will increase) at about 21% (1/2 of the historical average of close to 40%). Moreover, investor bearishness (belief that markets will decline) stood at close to 50%, while the long term average is about 30%. According to AAII, investor sentiment hasn’t been this pessimistic since April 2013 when the S & P 500 stood at 1,571. Since then, the S & P 500 has risen to 2,600 translating to an increase of 65% or about 10% per year.
It would have been great to have been fortunate enough to add new funds at that level of pessimism. Investors are now being given a rare opportunity to enter at those same levels. How are they responding? They are running for the exits!
We are in the midst of one of the greatest (and the longest) bull markets in history and it also remains one of the most hated, feared and mistrusted. Great bull markets almost never end when the presenting investor sentiment is fear.
Legendary Investor, Sir John Templeton (Templeton Funds), summarized the relationship between investor emotions/sentiment and market life cycles by stating that bull markets are born on pessimism (March 2009), grow on skepticism (2010-present), mature on optimism (Investors presently display little if any), and die on euphoria (likely as long as a decade away).
I believe that we are somewhere between pessimism and skepticism even after one of the greatest increases of both stock prices and dividends in modern history. Regardless of what happens over the short-term (3 months to one year) I believe we are likely in the 4th inning of what will go down as one of the greatest bull markets in history.
Market returns are extremely random in the short term. It is quite possible – and even probable – that within this great bull market, we will experience a bear market (decline of 20% from a recent high). Should we decline another 5%, we will be in bear market territory. The average bear market has been down 30%, so it wouldn’t be surprising to see another 15% decline in the short run. This happened during the great bull market from 1982-2000. There was a 30% decline in 1987 and a 20% decline in 1990. Notwithstanding those two cyclical bear markets — within a long term secular bull market — the S & P increased from about 130 in 1982 to about 1400 in 2000.
History suggests that we are in the middle of such a long term bull market and until the presenting investor sentiment is euphoria – which we are nowhere close to, this bull likely has many more years to run.
Wishing everyone and their family a happy holiday and a happy, healthy and prosperous 2019!
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