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THERE’S AN INVESTOR sentiment chart that gets dusted off and passed around after long periods of market malaise. Using the chart, active investors aim to identify when people have given up on stocks, so they can buy shares at the point of maximum pessimism.
Looking back, it appears that late 2021 marked the chart’s “euphoria” phase, and we’ve since been descending through the stages that follow—anxiety, denial, fear and so on. Which phase are we currently in? We’ll only know in retrospect. Still, it was another harsh couple of days for the stock market at the end of last week. Those big down days followed big gains on Monday and Tuesday. Investors might feel like this market just can’t get back on its feet.
This year has been among the worst on record for broad stock and bond index funds. Consider that a portfolio allocated 60% to U.S. stocks and 40% to domestic bonds was down more than 20% through September. Factor in inflation, and that’s nearly a 26% decline.
Charlie Bilello found that only the awful year of 1931 featured a worse return for the 60-40 portfolio. With the Great Depression in full swing, a balanced portfolio lost 27.3% that year. What was different then, though, is that there was severe deflation—to the tune of 8.9% that year, according to the Federal Reserve Bank of Minneapolis. This year, economists at Goldman Sachs expect the Consumer Price Index to rise 6.2%. Result? Adjusting for inflation, 2022 could potentially rank as the worst year on record for the 60-40 portfolio.
How does that make you feel? It’s no doubt a gut punch for folks who recently retired and no longer have regular savings with which to buy today’s cheap stocks and bonds. By contrast, for those still saving for retirement, it’s quite likely a great time to invest.
Feeling frustrated about 2022’s market losses? Remember, it’s after times like this—when folks feel financially down and out—that massive long-term wealth is typically generated. Buying when stocks are off 25% has historically produced great long-run gains. What about bonds? There’s also good news there: Today’s higher yields mean reasonable returns are likely in the years ahead.
Thanks for the chart Mike. The markets certainly know how to toy with investor emotions. The 15+% stock market rally from mid-June to mid-August surely got many investors thinking the worst was over and moved their emotions back up that downslope a couple of notches.
Bear market rallies can indeed be frustrating. Already quite a few of them this year. Feeling like 2000-02 (although I was in middle school then!)
Well, this retiree is still buying stocks. I am sticking to DCA for now, since the stocks I buy are still somewhat above fair value. If the market plunges, then I will consider taking larger positions.
“Just keep buying” if possible!
Thanks, Mike. I appreciate the “pulse of the market “ articles that you provide.
Thank you, Edmund!
One of the easiest asset classes to time is high yield. Maybe you can do a piece on the historical spread between high yield and treasuries…if we do have a recession and high yield spreads widen significantly, they could offer a great buying opportunity.
The HY OAS can peak at just about any amount. Very hard to time.
https://www.yardeni.com/pub/usinterestrate.pdf
Thank you.