The stock market recovery following the financial crisis has passed through various stages and descriptions; the first 100% gain, which took about 3 years, were characterized by skepticism. By 2013, which added an additional 30%, it was being called “the most hated bull market”. In 2015 and 2016 it was “retail is still on the sidelines” and as 2017 logs another round of new all-time highs, we are wondering if this is the “blow-off top.”
What all these labels have in common is their negative tone. Which is healthy in that it has provided the “wall of worry” for prices to climb, which is preferable to the euphoria that usually coincides with true market tops.
But are investors still truly skeptical, or is their embrace of ETFs indicative of a blind, albeit more ‘passive’, bullishness? And if there still is a good deal of worry, is that enough to keep stocks chugging higher?
Mike Santoli, market commentator for CNBC, has a great piece in which takes the pulse of the market and tries to divine what it might mean for future returns.
Here’s an excerpt:
Hate, as your mother probably told you, is a strong word, and it no longer seems to capture the public’s attitude toward stocks. Yet the typical investor still doesn’t quite trust this market, feeling wary of its heights and suspicious of its foundations.
The way this mistrust plays out from here will be a big factor helping to determine how long and far the bull market can carry on.
Investor ambivalence can be glimpsed from a few angles. The monthly Bank of America Merrill Lynch global fund manager survey shows a record percentage of pros see a “just right” investment backdrop of strong growth and low inflation. Yet those calling stocks “overvalued” is also near record highs, and cash levels remain above average – hints of caution tempering the optimism.
Yale economist Robert Shiller has surveyed professional and amateur investors for decades about their market expectations. Right now, both groups’ confidence that stocks will rise over the next year is near a multi-decade high. Yet the counterpart “Buy the Dips” and “Crash Confidence” indexes show elevated anxiety that the good times could end suddenly and painfully.
Other surveys show a fairly familiar pattern, with professional investors (tracked by Investors Intelligence, Market Vane, National Association of Active Investment Managers) largely bullish, refusing to fight a sturdy tape, while Main Street’s faith in stocks is fragile, with the latest American Association of Individual Investors poll showing just 24 percent bullish on equities.
The movement of real investor cash conveys mixed messages of its own. Flows into stock funds have been uneven, with net withdrawals over the past three weeks as the market stalled near record highs. And when money does go into stock funds, it’s overwhelmingly into passive index vehicles.
Year to date, $178 billion has gone into index funds, with $52 billion exiting actively managed portfolios that seek to beat an index. Since the end of 2008, there have been net redemptions from domestic equity funds, with the $756 billion into exchange-traded funds not quite offsetting the $877 billion out of traditional mutual funds. And over the past decade, Merrill says $2.2 trillion has entered passive funds while the same amount fled active.
It’s tough to pull a clear investor sentiment signal from the sheer dominance of index funds. On the one hand, low-cost passive investments are simply a better mousetrap in many respects, one that’s finally reached mass adoption.
— The Option Specialist