The Most Important Chart Of The Past Decade?

The following excerpt from the February 5, 2019 issue of the Global Investment Letter discusses one of the most surprising and important charts I’ve seen in the past ten years and the potential consequences for the S&P 500 and other markets.

The S&P 500 posted a very strong January rally following a sharp bullish reversal late in 2018.  The chart below helps to explain the strong, and widely unexpected, rebound in U.S. equities, the likelihood of the rally continuing, and implications for the next bear market.

This chart of the State Street Investor Confidence Index is one of the most dramatic we have seen for some time.  According to the chart, investor confidence at year end 2018 was significantly below levels seen at the bottom of the last bear market in March 2009!  Such extremes of sentiment almost always present relatively low-risk buying opportunities…….and this was no exception.

What is surprising is that sentiment grew so negative in a much better economic environment than that existing in early 2009.   It may not be possible to pinpoint a precise reason given the proverbial “madness of crowds.”  However, a possible contributor to the pessimism may lie with the current political environment in the United States.  Political views are highly polarized and confidence in institutions has been eroded.

Moving forward, an important consideration will be how investors with this state of mind will react to more substantial negative news than that of late 2018.  There is growing evidence of a global economic slowdown. Economic growth in the European Union and China is claearly slowing. The Fed has recently paused its interest rate increases in response to signs of economic softening.  As we have discussed for some time in the Global Investment Letter, the next recession in the United States is likely to be very severe given the elevated levels of debt throughout the system and the limited means available to the Fed to combat it. 

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