6 reasons to be bullish
3. Investor sentiment has changed
For example, stocks recently comprised 35% of household financial assets compared to over 50% in early 2000. Over that period of time, households withdrew about $1 trillion from stock funds. And almost the same amount has flowed into bond funds since March 2009. U.S. public pension funds have also been selling stocks, with allocations falling from 70% to 52% over the past 10 years, according to the Financial Times.
These shifts reflect huge changes in investor confidence. Confidence about the economy was very high in early 2000, about double today’s level. Today’s low confidence is clearly related to the losses experienced during the financial crisis and its aftermath as we deal with the related problems of debt, lack of demand, and weak job growth. The labor market is particularly important. In early 2000, the unemployment rate was just over half of today’s 7.7%. The takeaway is that bull market peaks are characterized by overconfidence. Back in 2000, when optimism was unrestrained, we recall a consensus forming that the economy would be less volatile with fewer and shallower recessions. There was growing belief that asset valuation didn’t matter. Conversely, bull markets are born from pessimism that makes investors cautious and keeps expectations low. Fears of another financial crisis are a good example of this. When expectations are low and fundamentals have been weak, improving conditions are more likely, i.e., it is easier to have a positive surprise. When expectations are very high, there is greater risk of disappointment. This confidence obviously has an impact on stock prices, with optimism usually leading to overvalued stocks and pessimism leading to undervalued markets. Confidence, while improving, is not high as we head into 2013. As a contrarian indicator, this is a positive.