This month’s theme is: “Structural Stock Market Sentiment”. Unlike the weekly Bull/Bear Indicator of market letter writers’ sentiment or the regular AAII member poll of optimists/pessimists, which can flip from bullish to bearish extremes rather quickly (literally in a couple of weeks), my view of investor psychology has a longer-term perspective. It is a three part process: at the end of a bear market, investors are gripped with fear and disbelief – if and when they come back into the market, they will purchase quality, blue chips – defensive stocks – Part I. After a period of time (a few years) wherein they witness stock prices making new highs (today’s market is making all time new highs) and/or not collapsing on bad news, they will eventually shift from disbelief to belief and trust – their new found courage will enable them to broaden-out their portfolio mix to include secondary issues and riskier cyclicals – Part II. And lastly, after a really strong market rise, the ‘animal spirits’ return and complacency and greed dominate investors’ emotions – they take undo risks with speculative issues – Part III.
Question: Where do you think we are today regarding this three part process? For sure we are not in Part III – the last time we saw excessive investor speculation was in the late ’90s, during the “Tech Bubble”! Currently, I believe that we are on the cusp of shifting from disbelief to belief; however, there are no real signs yet that the public is moving in this direction because they still have trilliions of dollars in money market funds and US Treasuries. The last four years have been a professionals’ market – note that the volume on the New York Stock Exchange is roughtly 650 – 750 million shares per day versus approximately 1.5 billion shares per day before the subprime bear market hit during the 2007 thru 2009 period. And let’s not forget that many of these professional portfolio managers have seriously underperformed over the past four years – they can’t afford to let this market run away from them – thus, they have been using the market’s hesitations as buying opportunities.