Investor Sentiment In The Tank

The American Association of Individual Investors’ sentiment report for their survey week ending September 21, 2022 registered bearish sentiment at 60.9%. A reading of 60% or worse in bearish sentiment has only been seen 4 times in the last 35 years. The first time was in October of 1987, the last in March 2009 … both uncommonly good times to put money to work in stocks.

Lack of perspective and competent media coverage

As I detailed in last week’s post (What has this market so spooked?), most people don’t have the time or technical background to have built any history on the twists and turns of the market. The media is no help as their goal is to engage rather than inform (scary news is usually a better attention getter). What is really scary is that you find many financial types, people responsible for managing OPM (other people’s money) spouting the scary stuff you get from the media. So, recessions, normal economic events, are hyped to be potential disasters with no attention given to historical periods when similar fundamentals were in place. I discussed some of these happenings in last week’s post. I point this out none of this is new. Historically similar events have unfolded and in an exact opposite way to the current media predictions. President Harry Truman said, “The only thing that’s new is the history you don’t know.” You need to take this statement to heart when processing the news of the day.

To make my point let me provide some (so-called) expert commentary on the Federal reserve’s moves last week as well as their stated intentions moving forward.

Michael Arone, chief investment strategist at State Street Global Advisors said, “It’s clear the economy is slowing yet inflation is ramping and the central bank is compelled to address it. Pivot to Europe, the ECB [European Central Bank] is raising rates from negative to something positive at a time when they have an energy crisis and a war in their backyard.”                    (CNBC 9/23/22)

The above statement is directionally true on the economy and misleading on inflation. As for the economy, it added 500,000 jobs in july (3.5% record low unemployment) and lost 300,000 in August (unemployment 3.7%). This is not dire when you consider jobs going begging in JOLTs report at 11.2 million.

In the case of CPI inflation, although the trailing 12 month number remained uncomfortably high at 8.3% (August), it was the 4th consecutive sequential decline in that number. The sequential increase in CPI versus July’s reading was only 1/10 of one percent. That would annualize to 1.2% if we held there. The point is that the rate increases are beginning to bite and we are headed in the right direction inflation-wise.

The Fed also forecast unemployment could rise to 4.4% next year, from 3.7%. Fed Chairman Jerome Powell steadfastly warned the Fed will do what it needs to do to crush inflation.

“By basically endorsing the idea of a recession, Powell set off the emotional phase of the bear market,” said Julian Emanuel, head of equity, derivatives and quantitative strategy at Evercore ISI. “ (CNBC–9/23/22)

In my mind the above statements were meant to shock us about what appears to be a normal business cycle event. Unless something much more dire, unforeseeable (always the case) is afoot I have trouble seeing the mass pessimism that exists.

The broad market appears cheap (Ex. The Tech/Innovation Trade)

We have seen this movie before in the 1970s with the “Nifty Fifty” stocks and in the Y2K bursting of the “Tech Bubble.” A fire hose full of money was aimed at a good-idea-gone-bad, technology and innovation. Why did the idea go bad? Investors forgot to consider valuation in their quest for superior results. They got carried away with some growth concepts that may have had little value. FAAMGMs were at one time at least 25% of the market cap of the S&P 500. I am attaching a slide deck from Ed Yardeni, president Yardeni Research, Inc. I think the impact on the performance of this index of the FAANGMs was huge and this should steer you to the more attractively sectors of the market.

Currently, Yardeni sees the Forward PE on the S&P 500 at 15.5, while the S&P 400 (mid-cap) and S&P 600 (small-cap) rest at 11.2 and 10.8 respectively. As was the case after the “nifty fifty” and ‘tech bubble” implosions it was time for these later two categories to fly. My recommendation in this panic is that it is time to go hunting away from last year’s favorites.

Let me reiterate:

“Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”

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