Bearish with bullish sentiments very low
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Last week ended with a bang. Market averages soared but still ended the week down. This is definitely head-spinning equity market action. The bond market experienced small shifts in the yield curve but rates, in general, did not continue to move higher. No matter how we slice it this year market performances have been terrible. Reality is even more difficult if your experience with investing began in 2009 as the markets marched higher and the mantra was to buy the dip because it worked repeatedly.
The S&P500 is still a couple of % points away from a bear market while the NASDAQ has been in a bear market for a while. The Dow Jones 30 has the best of the worst for averages this year because the Dow consists of mostly value companies. Value, meaning stocks that produce goods and services-ie: companies that make things and own real estate or energy. Microsoft and Apple are recent additions as is Salesforce but we still have Walmart, Cummins, Verizon, Visa, Nike, Coca-Cola, etc. Growth stocks have been the winner since 2009 far surpassing Value stocks. Previously, market analysis over the long run showed Value outperforming Growth.
Headlines in Barron’s this weekend reflect the confusion in market behavior:
- “Don’t Panic When the Market Swoons"
- “The 60/40 Portfolio is Having the Worst Year Ever”
- “The Bear Market is Already in the 3rd Inning, Stay Calm and Defensive”
All this commentary and advice is delivered more on short-term market performance and emotion. The investment universe for individuals consists of choices. The overall choices are driven by the difference between risk and return. The less risk you take the lower your long-term returns. The more risk you take the greater are your long-term returns. If you could earn the same return on a risk-free investment as a risky investment why would you choose the risky investment? You would not because that makes no sense. To create the incentive to invest in riskier assets, the motivation is that your returns will be greater. As far as stock is concerned that is called the “equity risk” premium. If you compare the risk and return for the risk-free investment, short-term US Treasuries, with the S&P500 for instance the return from the S&P500 is 9.8% vs. 4.71% for 3-month T-Bills.
Given the long-term higher returns for the stock market over time and the limited investment choices, stocks can give you the highest return over time, despite bear market conditions as the market cycles on. With that being said, it is very difficult to buy stocks when they are falling psychologically. Does the term “catching a falling knife” resonate? Picking market tops and bottoms is problematic. Investor sentiment remains very bearish with bullish sentiments very low. This peaked several weeks ago but remains solidly bearish. Jerome Powell admitted that navigating a soft landing for the economy was a huge challenge. In translation, a recession could be the result of the Fed’s action and other factors of course. Currently, Fed target #1 is inflation which remains extremely high even though the trend is lower but only marginally.
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