By Gary Alexander
A decade ago, on Thursday, March 5, 2009, bearish sentiment on the stock market hit an all-time high.
The weekly poll of the American Association of Individual Investors (AAII) is widely considered to be a contrarian indicator, since investors tend to be super-bearish at market bottoms and super-bullish near the top. In the AAII survey, investors are asked if they are bullish, bearish, or neutral on the market over the next six months. Historically, the lowest-ever percentage of bears was just 6%, set on August 21, 1987, the week the market peaked before the catastrophic 1987 crash. The highest percentage of bears was 70.3% in the poll released March 5, 2009, the day before the major stock market indexes bottomed out.
Over the life of this survey, the average bearish sentiment has been 30.6% (with about 35% each as bulls or neutral.) The standard deviation is 10.1 points, which means that approximately two-thirds (68%) of all poll results fall between 20.5% and 40.7% bearish, but on March 5, 2009, the bears peaked at an incredible four standard deviationsabove the norm. (Four standard deviations include 99.9% of all cases, meaning there is about one chance in 2,000 of reaching four sigma on the upside: One week in 40 years!)
The day after the AAII poll reached a record bearish level, the S&P 500 bottomed out on an intra-day level at an ominous 666.79. It went on to rise 39.5% over the next six months and 56.9% in 12 months.
The AAII poll was not an outlier. Professionals were equally bearish at the market lows. On Monday, March 9, 2009, a Wall Street Journal headline asked: “Dow 5000? There’s a Case for It… Earnings Point to 1995 Levels for Stocks.” The article began, “As earnings estimates are ratcheted down and hopes for a quick economic fix fade, the once-inconceivable notion of returning to Dow 5000 or S&P 500 looks a little less far-fetched.” On that day, the S&P 500 closed at 676.53 and the Dow closed at 6547.05, their lowest close of the 21st century. Both indexes have more than quadrupled from those levels in 10 years.
Investor sentiment was slow to recover. On the one-year anniversary of the market low (March 9, 2010), The Wall Street Journal quoted a worried Robert Shiller in an interview titled, “Stocks Still Expensive.” The market was overvalued, Shiller said, because his CAPE ratio had gotten above 20, which “signaled that the stock market was expensive and sooner or later would hit a stretch of subpar returns.”
Investors have been super-slow to get back into this market. The results of a May 2018 Gallup poll showed that the percentage of American households owning stocks fell from 65% in 2007 to 55% in 2018, implying that at least 10% of Americans owned stock in 2007 but were so scarred by the 2008-09 crash that they stayed out of stocks – permanently. The paranoia profile for Americans under 35 is even worse. During the mostly-bullish years of 2001-2007, 52% of young Americans owned stocks vs. just 38% from 2008 to 2018. Jason Thomas, chief economist with the Carlyle Group, a private equity firm, said, “Psychological scars from the crisis make this one of the most unloved bull markets in history.”
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Perhaps this new reticence to invest comes from the volatility of this bull market. We’ve seen eight corrections of 9.8% or more. During the past 10 years, there were two corrections of 19% or more – the traditional definition of a bear market. The first was in 2011, seemingly confirming the bears’ worst fears.
The Power of “Reversion to the Mean”
Soon after the market bottomed in March 2009, I gave a talk about “reversion to the mean” at the Atlanta Investment conference in April. One of my first columns for Navellier & Associates covered the essence of that talk – basically that a historically large market decline implies an equally strong recovery phase.
My May 2009 Navellier blog entry was titled, “The Worst Crash Since 1929 Implies…the Best Recovery since 1932?” It received unexpected press coverage, since my idea seemed against the grain. Matt Krantz of USA Today called me the next week to ask for some more details and he wrote a review of that article.
In that article, I wrote, “A historical bottom like 1932, 1974, 1982 or 2009 implies a greater return. A reversion to the mean implies a market recovery on the order of 75% to 100% in two years.” Matt Krantz of USA Today summarized my view: “In the 12 to 21 months following the market bottoms after the previous five recessions, the Dow on average rocketed 55%, says Navellier & Associates.” In my column and in USA Today, I compared the then-recent (2007-09) decline and recovery to five previous analogues:
As it turns out, one year after that column was published (and 14 months after the market bottom), the Dow was up 79%, the greatest 14-month gain since 1933. That’s the power of “reversion to the mean.”
The last 20 years represent a massive reversion to the mean. First, tech stocks shot to the moon in 1999 and collapsed in 2000-02. Then there was a doubling of the major stock indexes from 2002 to 2007, lasting almost exactly five years. Then came a 55% decline in 17 months – October 2007 to March 2009.
The 10-year bull market we’re celebrating this week represents a “catching up” to the losses of 2000-09.
As you can see, the last 10 years have been one huge reversion to the mean. NASDAQ, though more volatile than most indexes, is only up a net 2.2% per year for the last 19 years. By comparison, the Dow Industrials have been “hot,” averaging 5.2% per year, while the golden mean S&P 500 is up 3.7% a year.
This is not a bubble by any means.
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