Tengler for WSJ: Investors Are Nervous — And That Could Support Stocks
By: Jack Pitcher, Originally published in The Wall Street Journal
Fund managers have lowest exposure to stocks relative to bonds since 2009.
Investors have a sour outlook on U.S. stocks. Contrarians say that is good news for the market.
Turmoil in the banking sector has dragged fund managers’ enthusiasm for stocks to a 2023 ebb, according to Bank of America’s most recent monthly survey. The stress adds to worries including lingering inflation, higher interest rates and a slowing economy that have driven them to cut their stockholdings to their lowest levels relative to bonds since 2009.
Institutions have pulled a net $333.9 billion from stocks over the past 12 months, according to S&P Global Market Intelligence data, while individual investors have yanked another $28 billion. Billions have flowed into cash equivalents, driving total assets in money markets to a record $5.3 trillion as of May 10, according to the Investment Company Institute.
To some, all that doom and gloom looks like a sign of hope. Many on Wall Street view extremes in sentiment one way or the other as the time to do the opposite. Warren Buffett famously advised investors to “be greedy when others are fearful.”
The S&P 500 slipped 0.3% this past week and has made little progress since the end of March, stalling after a strong start to the year for highflying tech companies that has left the index up 7.4% for the year. This week, investors will get a fresh look at the health of the economy with the release of April retail-sales data and earnings reports from retailers Walmart, Home Depot and Target.
“The technicals and the sentiment side of the equation to us are just way offsides,” said Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers, a $1.2 trillion asset manager. “Not only does that limit the downside, but if you get any more positive news, that could easily squeeze the market higher.”
Cautious stock picking hasn’t offered much advantage in the market turmoil so far, and the longer that managers lag behind, the more pressure they will be under to add risk back into portfolios, Mr. Janasiewicz said. Active fund managers have largely underperformed the S&P 500 this year, with only one in three actively managed large-cap mutual funds beating their benchmarks in the first quarter.
Individual investors share institutions’ bearish view, according to the long-running weekly survey from the American Association of Individual Investors. The survey showed 41% of individual investors expect stock prices will fall over the next six months, down from a recent high of 61% in September that preceded this year’s rebound but above the 31% historical average. The survey is commonly used as a contrarian tool, with investors expecting higher returns following extreme levels of bearishness and lower returns when sentiment is particularly upbeat.
Nancy Tengler, chief investment officer of Laffer Tengler Investments, said her firm has added more new equity positions than normal in recent weeks as indexes stalled and attitudes soured. After the firm trimmed winning trades earlier this year and ran its cash allocation to a mid-single-digit percentage—higher than normal—it has been looking for bouts of volatility to put money back into stocks.
“You’ve got all this money on the sidelines,” said Ms. Tengler. “In our view, when bearishness is that universal, it’s historically always been a great time to look for opportunities.”
Analysts at UBS Global Wealth Management have for weeks warned that stock valuations look high and markets are betting on a too-rosy outcome for the economy. That very caution may help put a floor under any fresh market drop, said Mark Haefele, chief investment officer at the bank’s wealth-management arm.
One potential catalyst for a rebound: investors front-running the Federal Reserve. After announcing another quarter-point interest-rate increase at the Fed’s May policy meeting, Chair Jerome Powell signaled that the central bank may be done raising the policy rate for now. Traders in interest-rate futures are betting that the Fed will begin cutting rates as soon as this fall.
That could prompt traders to pile in ahead of any potential rate cuts, he said. Rate cuts are typically viewed as a boost to stocks, which start to look comparatively more attractive than bonds.
“Positioning data suggests there’s a lot of money waiting to be put back into equities,” said Mr. Haefele. “That possibility could bias investors to be early rather than late in adding risk, with a decent pullback in equities viewed as a buying opportunity even before the first rate cut. Investors’ desire to be early on the Fed rate cuts may prevent equities from declining more than 10%.”
The Fed has given no indication that it plans to cut, and if the central bank lowers rates soon, many believe it will be due to further turmoil with banks or a sudden recession—either of which could hurt stock prices.
And the last time fund managers were positioned as favorably toward bonds, in 2009, rates were near zero, so bonds paid little interest. The rally that followed gave birth to Wall Street sayings like “there is no alternative” to U.S. stocks. Today, high-yield savings accounts are paying 4%.
One group that hasn’t stopped buying this year: hedge funds. They have increased their stock exposure by a net $30.8 billion since the start of the year, according to S&P.
Still, few in the market appear interested in adding risk right now, added Mr. Janasiewicz of Natixis.
“I’ve been out sharing my optimistic view in meetings with clients, and I’m taking a lot of flack for it,” he said.
The comments expressed represent the personal views of Laffer Tengler’s investment professionals based on their broad investment knowledge, experience, research, and analysis. The comments are not specific advice tailored to the specific circumstances of a particular individual. The comments are general and for informational purposes only, based on information and conditions prevalent at the time of publication. The comments are as of the date of publication and are subject to change without notice due to changes in the market or economic conditions that may not necessarily come to pass. Forward-looking statements cannot be guaranteed. This is not a recommendation to buy or sell a particular security, nor is this financial advice or an offer to sell any product. Viewers should not consider or place specific reliance on the content presented as comprehensive advice nor as an offer or solicitation to buy or sell securities. Laffer Tengler will not provide notice of any change in its opinions or the information contained in this appearance. Individuals are strongly encouraged to seek professional advice specific to their market, economic, regulatory, political conditions, and obligation change.
The information contained in this appearance is for informational purposes only and should not be considered an individualized recommendation or personalized investment advice. Do not use this information solely when making investment decisions nor select an asset class or investment product on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs, and investment time horizon. There can be no guarantee that any listed objective is achievable nor assurance that any specific investment will be profitable. Laffer Tengler does not undertake to advise you of any change in its opinions or the information contained in this appearance. Different types of investments involve varying degrees of risk, and there is no guarantee that a portfolio will achieve its investment objective. Always consult a financial, tax, and/or legal professional regarding your specific situation. Past performance is no indication or guarantee of future results.
Laffer Tengler does not control and has not independently verified data provided by third parties, including the data, charts, and graphs presented in this appearance. While we believe the information presented is reliable, Laffer Tengler makes no representation or warranty concerning the accuracy or completeness of any data presented herein.