The fears and doubts swirling around about the economy, coupled with plunging earnings and recent negative job reports, have triggered a sudden loss of enthusiasm for investing in stocks.
It’s a fact: The market has been going up for six years now, which is significantly longer than the typical 3.5-4-year bull. But many are wondering how much longer this upswing can last. Here’s proof of the doubters: This week it was revealed by the American Association of individual investors that just 25% of individual investors are “bullish” on the U.S. stock market. The bull market for the S&P 500 is in its 75th month, having started its upward run as of March 1, 2009.
So what gives? Why is the enthusiasm level for the stock market dropping lower than the long-term average of around 39%, and should we be worried?
Not necessarily. According to a recent CNN Money piece, investors shouldn’t view low sentiment reports as a reason to ditch the stock market. In fact, many sophisticated investors view a decline in bullish investors as a positive sign for stocks. “After all, the best time to buy is when fear drives prices lower–and vice versa,” the article stated.
On the flip side, the times one should be worried are those when the majority of investors are bullish. History has proven that too much enthusiasm is what will bring the bull market down.
Even though some experts say low stock market sentiment is actually a good thing, it makes perfect sense people are still worried. Following are some of the main reasons:
- The Federal Reserve is likely to raise interest rates soon.
- The economy struggled significantly more during the first quarter than people were anticipating.
- The strong U.S. dollar is hurting some companies that do significant business overseas.
- Oil prices are continuing to plunge, and for the first time in several years, investors are preparing for an outright decline in earnings.
- In spite of low sentiment, U.S. stocks are still expensive. According to a May 26 Bloomberg article, with oil’s rebound helping U.S. energy producers recover from a 27 percent plunge, the lowest-priced industry in the S&P’s 500 Index just became banks, where the median company trades at 17.6 times earnings from the past 12 months. Obviously, that’s no bargain. Unfortunately, there aren’t any better alternatives, as bond yields are hovering near record lows, and equities’ profits are waning as the Federal Reserve prepares to raise interest rates.
In spite of all these factors, some investors insist they still like U.S. stocks, and the dip in bullish investors is just another reason why. They believe Federal Reserve rate hikes, if done incrementally, will not have an immediate negative impact on U.S. equities in the current environment. They also feel the combination of a strong dollar and cheap energy could actually be a major positive for the majority of Americans, even if it causes short-term earnings turbulence.
Bottom line: Try not to let investor sentiment necessarily sway you in one direction or another when it comes to investing in stocks. Examine all sides of the market for yourself, talk to a financial professional if you have questions, and ultimately do what you feel is right.
