Why it's a good thing that investors and financial advisers are bearish

When's the last time a client berated you for not being bullish enough?

May 19, 2016 @ 3:53 pm

By John Waggoner

+ Zoom

What's the biggest thing mutual fund companies are hearing from investment advisers? Fear. And that may be a good omen for the market.

“Whether it's an adviser audience or speaking to investors, I can't remember the last time I got a question that had a positive spin to it. All almost bordering on Armeggedon questions,” said Liz Ann Sonders, chief investment strategist for Charles Schwab.

Brian Langstraat, CEO of Parametric Portfolio Associates, a Seattle investment manager, noted that he had recently gotten a call about missed market opportunities. “It was the first time since the financial crisis that I'd gotten a non-fear-based question,” he said.

(More from ICI: Schwab's Sonders, OppenheimerFunds' Memani: Trump's policies could hurt U.S. economy)

The fear has been measurable to the fund industry executives gathered in Washington, D.C. for the Investment Company Institute's annual general membership meeting. The easiest way to measure it: Outflows from domestic stock funds.

“Not a single dollar of net new money has come into the U.S. equity market, from a fund perspective," Ms. Sonders said. “That remains the most powerful support for a secular bull market.”

The numbers bear her out. Investors have yanked a net $24.1 billion from domestic stock funds and exchange-traded funds since the week ended April 13, according to the ICI. The biggest sellers: Taxable bond funds. And $2.7 trillion sits in money market mutual funds, earning an average 0.10% interest.

And investors are indeed fearful. The Investors Intelligence survey of investment advisers shows the ratio of bulls and bears to be well below the highs of 2015, although above their February lows. Among individual investors, sentiment is markedly bearish, with just 20.4% bullish.

While greed may be good on Wall Street, fear is good for investors. Typically, the best time to buy is when investors are fearful — and the greater the fear, the greater the likelihood that risk is overblown. While sentiment isn't at strongly bearish levels,it certainly isn't at the wild-eyed readings normally seen at the top of a bull market — and that should give investors and their advisers some comfort.

(Updates earlier version of story to correct name as Brian Langstraat, CEO of Parametric Portfolio Associates.)

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