Are Investors Too Bullish?

With a 50% rally off the March lows, there is a growing consensus that investors are too bullish. Bears argue that the 'buy any dip' mentality can only end one way, and it's not pretty. While investor sentiment is nowhere near as downbeat today as it was in March, it doesn't seem overly bullish either. One case in point was this weekend's Barron's interview with Merrill Lynch's Chief Global Equity Strategist Michael Hartnett. When asked about the typical Merrill Lynch client's asset allocation, Hartnett noted:

At the end of last year, it was 50% in cash and fixed income, and only 25% in equities. That's no great surprise, given what happened last year. The Merrill Lynch private-client numbers show that those allocations haven't changed much over the first half of this year.

In fact, most of the inflows that we have seen going into mutual funds have been fixed income, commodities or emerging-market equities. And you continue to see redemptions from classic U.S. and international large-cap equity funds. So there is no way that you can say that retail investors have gotten religion about equities.

The fact that typical client allocation to equities has been unchanged at 25% compared to the start of the year hardly portrays a picture of investors throwing caution to the wind.

Comments

[Prudent Man CFA]

I didn't realize that anyone who paid attention to Barron's and Merrill still had anything to invest.

2009 Aug 10 02:40 PM

[Ed Cormack]

Bears Coming !!

2009 Aug 10 02:43 PM

[Mad Hedge Fund Trader]

By miles. Welcome to the square root shaped recovery. That is the likely shape of the recovery curve we can expect over the coming years. If you back out what I call the “2000’s fluff” of excess car production, liar loans, using the home ATM for serial, annual refinancings, excess consumption, unneeded home construction to account for the new frugality, US GDP growth drops by 1%. Chop off another 1% for deleveraging in all its forms, including lower leverage ratios, the end of the collaterized debt markets and credit default swaps, ultra high junk yields, bond ratings for sale, and the new conservatism of CFO’s and auditors. That leaves you with a 1% growth rate that Japan has seen for the last 20 years. That means falling standard of livings, an unemployment rate permanently stuck at German style double digits, endemic deflation, a collapsing dollar, a comatose real estate market and moribund stock markets. Where are the 37 million jobs going to come from that American needs over the next decade? If your kid is going to graduate from college soon, or cash out from the army, he better start learning Mandarin.

3% Average US GDP growth rate 2002-2007
-1% Bank deleveraging
-1% 2000’s fluff-liar loans, excess home construction, excess car production
-1% real GDP growth 2010-2020

2009 Aug 10 02:57 PM

[Alex_G]

According to BAC, homeowners spent 30% of home appreciation between '02 and '06, adding 200 basis points to GDP. Add the increased savings rate, and the consumer can only be counted on providing 62-64% of GDP. Will corporate investment and exports step up? Will the Govt raise taxes and permanently fill the gap, thus retarding real growth?

Temporary spending measures tend to become permanent, so my guess is that we gravitate toward the Govt option. 1-2% growth could be the norm unless we step up immigration.


On Aug 10 02:57 PM Mad Hedge Fund Trader wrote:

> By miles. Welcome to the square root shaped recovery. That is the
> likely shape of the recovery curve we can expect over the coming
> years. If you back out what I call the “2000’s fluff” of excess car
> production, liar loans, using the home ATM for serial, annual refinancings,
> excess consumption, unneeded home construction to account for the
> new frugality, US GDP growth drops by 1%. Chop off another 1% for
> deleveraging in all its forms, including lower leverage ratios, the
> end of the collaterized debt markets and credit default swaps, ultra
> high junk yields, bond ratings for sale, and the new conservatism
> of CFO’s and auditors. That leaves you with a 1% growth rate that
> Japan has seen for the last 20 years. That means falling standard
> of livings, an unemployment rate permanently stuck at German style
> double digits, endemic deflation, a collapsing dollar, a comatose
> real estate market and moribund stock markets. Where are the 37 million
> jobs going to come from that American needs over the next decade?
> If your kid is going to graduate from college soon, or cash out from
> the army, he better start learning Mandarin.
>
> 3% Average US GDP growth rate 2002-2007
> -1% Bank deleveraging
> -1% 2000’s fluff-liar loans, excess home construction, excess car
> production
> -1% real GDP growth 2010-2020

2009 Aug 10 03:21 PM

[Analyste de Boston]

I'm not sure the Barron's interview tells us much (it's subscriber-only.) What are the age, risk-tolerance, and assets of "the average investor" ? It sounds like 'the Average Investor' isn't doing much either way, actually. Didn't get short, hasn't gone long = treading water?

What would you expect most investors to do, really? I'd expect "not much" - the savvier ones are moving to alternative strategies - commodities and leveraged vehicles like ETFs are the easier solution - but when was the smart money ever 'the majority'?

The real question: is the vanguard bullish or bearish? Again, not much useful info (here) to draw an informed conclusion either way.

2009 Aug 10 04:52 PM

[Analyste de Boston]

Here's the counter-intuitive point that desperately needs to made to independent voters and right-leaning investors: America requires increased immigration. We should allow any middle-class foreigner to buy property and start businesses here, starting yesterday.

If we're to remain competitive AND have a 'free market' solution, there has to be freedom-of-movement for capital. We don't need the reactionary, Palin-lovin' Birther trash to destroy this Land of Opportunity. But they will, I fear - as the nativist forces prevail, immigration will become a third-rail topic.

And we all lose.

On Aug 10 03:21 PM Alex_G wrote:

> 1-2% growth could be the norm unless we step up immigration.

2009 Aug 10 05:10 PM

[Moon Kil Woong]

I don't think it was investors per se that ran up the market in the first place. It is institutional investors, big banks, global and sovereign wealth funds, etc. If it was average people we would have seen large volume at least periodically.

Thus, the real question is will the little guy play ball at these prices so the institutional investor and big banks can get their big payoff and absolve themselves of some of the risk they took running up the market. And will the prices hold when the dollar rallies?

2009 Aug 10 06:54 PM

[whidbey]

The earnings were not worth the riot to buy; in the long run the earnings will fall and that will pull the equities down (text book), but watch the Fed's plans.

Some think the Fed will get out of the QE business soon. Wrong, the Fed will be shoving cash at everything until the housing zombie walks among us once again. So 2006-7 is their thinking that they feel good about getting it wrong.

There is some time to wait - 6-8 years, all else equal. We are about to start the great freeze where only zombie banks and governments exist and everything else vegetates. Now is a good time to visit the moon.

2009 Aug 11 12:54 PM

[David Van Knapp]

Most data suggest that the "average consumer" (whoever that is) has become more conservative in day-to-day spending. This is demonstrated by lagging store sales, deleveraging of personal credit, higher savings rate, falling credit availability, troubled job market, etc. Thus it stands to reason that these same individuals have become more risk-averse in their investments too. So it's not surprising to see more $$ directed toward safe-haven money-market accounts, high-grade bonds, mattresses, and the like than toward riskier assets like stocks. There is money available to invest, but the will to put it into risky investments is low. People are focused more on return OF their money than return ON their money right now.

There's no telling how long these trends will last, although my gut tells me they are closely tied to the job market--whether people have jobs, and among those that do, how secure they feel their job is. We're somewhere around the tipping point now: The recession is probably close to being technically over, but that is not yet reflected in the job market (employment is still declining, but at a slowing rate). The question is whether the stock market can "bridge the gap" between the technical end of the recession and the beginning of expanding employment. If this becomes a "jobless recovery" for more than a few months, the stock market rally will probably fizzle out.

2009 Aug 11 03:58 PM