In recent times I’ve shared with you some observations given to me from some pretty smart people, who have been seduced to the ‘dark side’. This is made up of doomsday merchants who always seem to be negative even after being wrong for about five years!
Some have been wrong for eight years after being right in calling out that something was worrying before the GFC. My old buddy, Professor Steve Keen, fits this bill. One day, he will be right again. However, with Jim Rogers, Dr. Marc Faber et al., they look set to be wrong for a bit longer yet.
One of the recent converts to the “market looks set to slide” fraternity, is an investment banker actually flogging a financial product that really should do better in a rising market. In reality, it works in a falling one too. He’s spooked about the bond market and what rising yields might mean. If they go up too fast, I’d worry a bit but I suspect the elevation of rates or yields will be fairly measured because growth and inflation aren’t going gangbusters.
Against these entrenched doctor dooms and the new converts, I always go back to what I’ve learnt from Sir John Templeton, which I have shared with you on many occasions. The great investor once wisely observed: “Bull markets are born on pessimism (2009-10), grow on skepticism (2011-16), mature on optimism (2017?), and die on euphoria (2018 or 2019?).”
I have spliced in the dates for our market and I suspect we’re not into the optimism phase. We were into it but slipped out early this year. We also dropped out in 2015, when Glencore looked like it was going to implode around October.
Certainly, the Americans on Wall Street have got into optimism big time, given where their markets are but there’s still a bit of skepticism, so they’re not in the euphoric stage.
I think the next crash will be determined by the Yanks. That’s why I’m comfortable about 2017, more wary about 2018 and more spooked about 2019. However, I could be convinced that this long drawn out economic and market recovery could go on longer than I’m guessing right now.
And a great column by Sam Ro, managing editor of Yahoo Finance in the US, made a few great points you need to be aware of. Here’s a quick summary:
- History shows that fear of a crash has a poor track record of predicting crashes. Conversely, some of history’s worst crashes came when no one was expecting one.
- Oppenheimer’s Ari Wald argues in a note to clients: “We continue to note that the sentiment backdrop is far from extreme optimism and instead quickly shifts to gloom and doom during market downturns.
“We saw this again last week as shown by a spike in the number of news stories referencing the words ‘Stock Market Crash’ to its highest level in years. For comparison purposes, there were significantly fewer occurrences of this through the topping process in 2007.” - Ro points out that more people are searching for a stock market crash in news websites today than they did before the last stock market crash.
- Yale School of Management tracks this fear through surveys, which feed into the school’s proprietary Crash Confidence Index [1]. The index represents the percentage of respondents who think there’s a less than 10% probability the market crashes in the next six months. And again it showed, that pre-GFC, few people were expecting a crash — euphoria can be blinding!
The Yale eggheads found in early 2009 that everyone was on crash alert just before the market shot up over 30%. I recall it well because I was in the minority camp telling everyone that big rebounds follow crashes rather than more crashes, unless a Great Depression was coming. I thought the worldwide government recovery plans, except in the EU, were likely to work and help stocks make a comeback.
Ro makes a great point: “In other words, the bottom in the stock market coincided with peak fears of an impending market crash.”
Clearly, it’s not wise to trust the herd. - Bank of America Merrill Lynch’s Savita Subramanian recently said that on his firm’s special indicator for detecting the direction of stocks, which is based on recommended equity allocations among Wall Street strategists, “it is predicting a 12-month total return of over 21% for the S&P 500.” He says the indicator is “firmly in ‘Buy’ territory.”
- Ro also points out that Citi’s strategist, Tobias Levkovich, is not worried about a crash now. He relies on the bank’s proprietary sentiment detection Panic/Euphoria model, which remains at levels similar to 2011-12. As he points out, this was a time when investors should have been buying stocks.
Apart from making me remain comfortable being long stocks and telling people I’m happy to be so, the big conclusion is that very few people were looking into stock market crashes before the last big crash actually happened and history says when we are all looking for one, it often doesn’t happen!
All this reconfirms the good sense of my other favourite piece of advice from a great investor, Warren Buffett: “Be fearful when others are greedy and greedy only when others are fearful.”
When euphoria comes to town for stock markets, that’s when I will be dialing down the happiness factor and dialing up the warnings.
That’s my job.
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