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Let Others Despair

Mike Zaccardi

EXPERIENCED INVESTORS know that the stock market and the economy sometimes diverge. Early 2020 offered a stark example: Even as the economy was still contracting rapidly, stocks started bouncing back.

But right now, many areas of the stock market are doing about what you’d expect. After all the efforts by the Federal Reserve and Congress to prop up the economy over the past two years, rising inflation is front and center, along with rising interest rates. Shares of growth companies, seen as more sensitive to higher interest rates, are in severe decline. Meanwhile, commodities—after pulling back slightly in late March—are climbing once again.

With inflation soaring and the stock market spluttering, investors seem to be giving up hope. The weekly survey from the American Association of Individual Investors shows a nearly 30-year low in optimism.

Sentiment data released last week by CNBC tell a similar story. The network’s All-American Economic Survey found that just 28% of investors think it’s a good time to be in stocks. That’s the lowest figure in the survey’s 15-year history. Meanwhile, Bank of America’s Bull/Bear Indicator is flashing extreme bearishness right now.

All this despondency may be good news for long-term investors. When people are most frustrated by stocks and the overall economy, decent returns often follow. If you’re like many folks and nervous about where financial markets are headed next, consider that risk is usually highest when euphoria abounds. That was true in early 2021, when the junkiest of stocks were all the rage. The waning enthusiasm we’ve seen since then may be exactly what we needed.

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Roboticus Aquarius
Roboticus Aquarius
7 months ago

There are several things happening at the same time:
Covid 19 in 2020 and since
Supply Chain issues (obv related, but several unique elements)
Ukraine War (again, these all link but have unique conditions)
Money Supply growth over many years, right up to 2022.

These issues piled on top of one another are formidable, and may take some time to move past, economically. Even so, employment is strong, the market is down less than 10%. Seems to me it could be much worse.

In any case, the highest probability of making money comes from holding on through the downturns. See you on the other side!

johntlim
johntlim
7 months ago

Nice piece. At extremes, pessimism tends to be a contrarian indicator. I wonder if the stock market will be a beneficiary of the bond market bloodbath.

Mike Zaccardi
Mike Zaccardi
7 months ago
Reply to  johntlim

Thanks. It appeared that way in March, but the latest jolt in rates has coincided with stock market losses. Quite remarkable the bond market losses this year. But the upshot is much better yields today.

Rick Connor
Rick Connor
7 months ago

Thanks Mike. I appreciate the context and positive thinking. Retiring into a declining market is scary, even if you have prepared for it.

Mike Zaccardi
Mike Zaccardi
7 months ago
Reply to  Rick Connor

Thanks, Rick. I find it quite something that U.S. large-cap stocks peaked right at Jan 1 – when so many people likely retired. A good gut check and perhaps a case in point of why the Kitces tent retirement portfolio allocation approach might work.

Tyler Winkle
Tyler Winkle
7 months ago

Hi Mike,

Nice blog! Question about the Bank Of America Bull/Bear Indicator: How do you check it day to day? Once in awhile I see it pop up in the news but it would be nice to know if there’s a website that you can go to for a real time reading or something. It sounds like this indicator tells you how investors feel about the market at any given time, which is a useful guide to for traders and investors alike.

Mike Zaccardi
Mike Zaccardi
7 months ago
Reply to  Tyler Winkle

I see it weekly in BofA’s “The Flow Show” research report published Thursday nights. There are similar indicators as I pointed out. The CNN Fear/Greed index is a popular one. TD’s Investor Movement Index is another.

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