Talking Points – September 2021

September 29, 2021 – Expectations

If you have been reading our notes over the years you are aware one of our favorite topics is investor sentiment. Despite an increasing number of ways to judge sentiment it has become more difficult to analyze in recent years due to information overload and how fast opinions are changing. Regardless, today we have a chart that made us do a double take when we saw the results.

A recent survey of investors by Natixis found that individual investors expected an astounding future return of 14.5%, above inflation! Meanwhile, financial professionals expected just 5.3% above inflation. For comparison the long-term average would be in the 7-8% range.

Source: Natixis

With the multi-year run in stocks these bullish individual investors have been rewarded by buying the dips and being very optimistic. Meanwhile, the professionals are more apt to have managed through and remember major bear markets over the years and get cautious more easily.

The end result of what the extreme difference in numbers mean will only be known in hindsight. One of our takes is the importance of communication between financial advisors and their clients to be sure everyone is on the same page with future expectations. Those assumptions can be an integral part of their financial planning estimates. 

In the meantime, we anticipate sentiment will continue to change rapidly in both directions as investors react more quickly to noisy news than ever before.

September 15, 2021 – Record Equity Exposure

With the multi-year run in stocks and the lack of appeal in bonds, US household direct exposure to equities is now at an all-time high.

This chart could understandably make investors nervous. They would not be alone as seemingly every major bank and firm on Wall Street has recently published negative outlooks. We share some of their concerns around valuation, Fed tapering, inflation and the chart above. However, the track record of those being negative on stocks is terrible, to say the least, and even worse when nearly all are negative. We find it more useful to believe stocks still offer more long-term appeal than bonds and most asset classes, while realizing having cash for future opportunities and not being ultra aggressive right now may be prudent.

The typically weaker seasonal period will end in the next few weeks, hopefully as the Covid numbers turn for the better. Investors will be well suited to stick with their pre-established plan and not react to what is happening around them. 

September 8, 2021 – Taking a Long-Term View

It is much too easy to get distracted by all the short-term noise around us every day. Sometimes it can be beneficial to take a step back and estimate where we might be in this secular cycle. 

Below is a chart of the Dow Jones Industrial Average going all the way back to the 1930’s. Historically stocks have tended to move in multi-decade trends. Coming out of the Great Depression in the late 1930’s stocks went on an approximately 20-year run before consolidating during much of the 1960’s and 1970’s. 

Stocks started another massive nearly 20-year rally in the early 1980’s ending with the tech bubble implosion around the turn of the century and then the Great Financial Crisis. 

Since the market bottomed in 2009, we have been on a 12-year run in stocks. Obviously, it has not been straight up. There have been a number of corrections, including the frightening March 2020 pandemic selloff. Undoubtedly there will be more in the future that test investor resolve. 

Typically, we would post a long-term bullish chart of stocks like this during a difficult period of the market to remind investors to focus on the broader picture. With stocks having climbed so much in the past year and many investors becoming increasingly bullish it could be argued we should be sounding alarms of caution. Perhaps that will prove true, as there is no way of knowing if t his secular bull market will match the 20-year timeframe of the previous two. However, in such a fast-paced world where investors want and even expect instant returns, we feel there is never a bad time to take a step back and consider the long-term view. 

Source: Greg Towner, CFA, CMT