KCS Quick Take – June 13, 2022
June 13, 2022
Mr. Market Is At It Again
Last week was certainly a difficult one, as Mr. Market continues to do his level best to scare the crap out of investors. If you, too, are worried or frightened, know that you are not alone. Investor sentiment, whether measured by surveys of individual investors or of investment newsletter writers, is at levels of pessimism rarely seen. Sentiment approached the current depressed levels in 2020 during the COVID shutdowns and has been this bad fewer than a dozen other times over the past 35 years. Pretty much the only time it was lower than today (and not by much) was during the darkest days of the Global Financial Crisis of 2008–2009.
Source: Investors Intelligence, Yardeni Research
The above graph, which covers 35 years of surveys, shows the ratio of bulls (people who think the market will rise) to bears (those who think the market will fall) among over a hundred investment newsletter writers, based on what they are recommending to their readers. (There is a similar graph of individual investor surveys by the American Association of Individual Investors or AAII, which is remarkably similar.) When the ratio drops below 1, there are more bears than bulls, which you can see does not happen all that often. The survey hit a low of 0.69 on May 24 (the most recent survey occurred before last week’s market decline). Individual investors tend to be more pessimistic than the pros, with the AAII survey having reached a low of 0.28 on May 28—almost 4 bears for every bull.
While sentiment surveys are far from perfect as market timing tools (because there aren’t any good market timing tools), it is true that markets tend to do very well following extremes of pessimism. The corollary is that you should want to be invested when everyone else is frightened and running for the hills, as nerve-wracking as this can be. While it’s impossible to identify in advance precisely when markets will turn, we know from hundreds of years of market history that they will recover, that the recovery will be brisk, and that it will take everyone by surprise. Trying to get out or stay in cash during the decline in the hopes of buying back in before the recovery nearly always results in significantly worse performance than staying invested. (I also know this from personal experience investing for over 45 years.)
“But inflation!” you may be thinking. “But interest rates!” “But recession!” “But Ukraine/Russia/oil prices!” Tell me something I (and the markets) don’t know. Markets respond to new information very quickly, and as of today, all the above is priced in. Could there be something lurking in the future that the markets don’t yet foresee? Of course, but these new developments could just as easily be positive as negative. Inflation didn’t come down in May, but maybe it will in June or July. The Fed seems poised to raise interest rates more quickly than investors thought just a couple of months ago, but maybe they won’t go as high as markets currently expect. Supply chains are still tight, but maybe China won’t have to shut down again, maybe Ukraine will be able to ship its grain, maybe more oil will come online from Saudi Arabia, Venezuela, even Iran and Iraq. I have no crystal ball on any of these, but I do know that focusing only on the problems makes it difficult to imagine any solutions.
Just as spring follows winter, market recoveries follow declines. Waiting for them can be harder than braving a frigid winter in Siberia. But sunnier days are ahead, I promise. If I could give you an exact date, I would, but we know that’s not possible. In the meantime, we at KCS will do our level best to keep you warm and continue to focus on buying investments that we believe will provide the best long-term returns.
Dr. Ken Waltzer, MD, MPH, AIF®, CFA, CFP®
The KCS Investment Department
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