Thankfully, the stock market has rebounded strongly since late March, with both the S&P 500 and the Dow Jones Industrial Average rising over 30% off their low points. Phew!
Is the Bullet Market Over?
Now with the economy beginning to open, there is significant investor and media focus on whether the March low represented the bear market bottom and whether we are in a new bull market cycle. Is the worst behind us?
The reality is that it’s often difficult to tell if the storm has passed or if we’re in the eye of a hurricane. Identifying stock market turning points is often done with the benefit of hindsight well after the situation has calmed.
The thing for long-term investors to remember is that it’s often unnecessary to try to guess the exact bottom! There are better ways to prepare your portfolios, and more concrete and insightful data to follow than simply watching the day-to-day movements of the stock market.
Investor Sentiment is a Key Gauge to Watch
Specifically, at a time when the economic data is backward-looking, gauges of investor sentiment can be telling. Investor sentiment data gives us a sense of whether investors in general are bullish (raring to go), bearish (backing off), or stuck in neutral. As the oft-used Warren Buffet quote suggests, it’s historically been wise to be “fearful when others are greedy and greedy when others are fearful.” So it helps to know whether folks are being fearful bears or greedy bulls.
There is no better example of this than the bull market that began in 2009, which, by many measures, was “unloved.” Sentiment was consistently low throughout the decade-long recovery as investors faced persistent fears of a relapse. Despite this, the stock market generated significant gains.
Investors Are Currently Bearish
Today, despite the recent rebound in markets, various sentiment measures are still extremely bearish. Not surprisingly, investor sentiment has hovered near its historic lows since February, while consumer sentiment has fallen to at least 5-year lows. This is driven in no small part by consumer expectations plummeting due to the economic shutdown. These sentiment measures may even worsen as poor economic data continue to surface.
Chart: Investor sentiment survey results show that investors are still extremely bearish. The y-axis shows the percentage of respondents that say they are “neutral” and the difference between those that are bullish versus bearish.
Sources: Clearnomics, AAII
Light at the End of the Tunnel
The critical factor in the bearish climate is the uncertainty around the coronavirus itself. After all, the catalyst for this crisis wasn’t inherent to the workings of the economy or financial system. At this point, however, there is a light at the end of the tunnel with the pace of new COVID-19 cases slowing and the economy beginning to reopen.
Ultimately, the obstacle for many investors is that they believe there is such a thing as a perfect market environment and that waiting for the right moment to pounce is the objective of investing. Unfortunately, by the time they pounce, it’s often too late. There’s really no good way to try to time the markets. Investing consistently is typically the best approach.
For patient investors, the best opportunities present themselves in market dislocations and crises, those periods when others are fearful. Thus, the main objective of any disciplined, long-term investor should be to stay balanced and hold a diversified portfolio that is appropriate for their financial goals. This is more important today than ever as other investors continue to be bearish.