Market Perspective – Who let the bears out?

Market Perspective

April 28, 2022

What happened

With global markets down double-digits this year, and daily headlines that include worsening China lockdowns, the ongoing Russia-Ukraine war, a global economic growth slowdown, multi-decade highs in inflation, and the Federal Reserve on the move, it’s little wonder why investors’ mood remains dour. As we discussed recently, this mindset is now being reflected in various measures of investor sentiment, which have moved toward an extreme.

Our take

Several of the aforementioned challenges are why we downgraded our view of equities to neutral in early April after having held a positive view of equities for the prior two years. The range of potential outcomes is wide, and the risk/reward is less positive than it had been.

However, one factor that has contributed to keeping us from downgrading equities further is depressed sentiment. Indeed, with markets, it’s not about good or bad – it’s all about better or worse relative to expectations. When expectations are low, a little bit of good news can go a long way. That’s why markets tend to bottom when fear and uncertainty are at an extreme.

The most recent survey from the American Association of Individual Investors (AAII) showed the percentage of investors holding a negative/bearish outlook jumped to 59.4%. This is the highest percentage of bears since early March 2009, which was a few weeks short of the major stock market bottom following the financial crisis decline (charts on next page). To be fair, investors were correctly negative in January 2008 in the early stages of that market downturn.

Still, with the percentage of bullish investors at just 16%, also near a record low, the spread between the bulls and bears is at -43%. This was previously only surpassed twice over the past 35 years – in the fall of 1990 and in the aforementioned March 2009 period.

In October 1990, the U.S. was in recession, which coincided with the Federal Reserve (Fed) raising rates and a sharp move higher in oil prices on the back of Iraq invading Kuwait. The extreme bearishness in this survey coincided closely with the low point of that market downturn and was followed by a 30%-plus rise in the S&P 500 over the subsequent year.

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