The Bull Has Been Shot And Wounded
Inflation, rising rates, new variants, recessions, war, what's there to be optimistic about? Well, the markets say, not much. Less than 20% of US investors are bullish right now. We need to go back to 2016 to see investors with such low levels of optimism. What's even more interesting than this, is that prior to 2016, we need to go back to 2003 and 1992 to see such levels of low optimism.
Furthermore, the last time we saw investors this bearish, was during the height of the pandemic in 2020, the darkest hours of the GFC in 2008, and we need to go back to 1990 to the time before the GFC.
In today's chart I've plotted the Bulls in red, the Bears in aqua, as well as the S&P 500 in blue. The numbers are slightly different to the numbers I've pointed above, and this is because of the moving average I've used in the below chart, otherwise the data becomes very noisy, so I've smoothed it out a little.
Everyone calls themselves a contrarian these days, so what does all of this mean for the stock market anyway? Let's take a look at how the stock market has performed following such low levels of pessimism.
Investors Sentiment (%) / S&P 500 Subsequent Return (%)
<20% / 6.5%
20-30% / 3.5%
30-40% / 2.25%
40-50% / 2%
50-60% / 0.50%
>60% / -0.50%
The conclusion is that the worse investors feel, the better the subsequent return in the market - on average. The better investors feel about the market, the poorer the subsequent return in the market.
Maybe, just maybe, the worse that things become, the better they're going to be. This might be a naïve way of looking at things, but I'm a massive optimist. I believe in better and I believe in progress. I am not foolish enough to think that these things are going to happen overnight. And I am not foolish enough to think these bullish or bearish periods last forever. Over long-term however, I will bet on the evolution of human beings.
How do you think the first human being felt when they witnessed the sunset for the first time? You are not them. Stop acting like it.
My colleague Matt Rigby and I talk more about this in last week's The Wide Lens podcast. I've shared the exact chapter where we discuss this below.
You can also listen to the podcast on Spotify or wherever else you listen to your podcasts.