It’s hard to make all the right moves in a crisis…
Fear sets in… Your adrenaline pumps… You focus on self-preservation. Staying safe in the moment feels more important than making the right long-term moves.
That’s true throughout life. And it’s true in the markets, too.
We all know falling stock prices can set us up for returns down the road. The market always comes back… So lower prices today will eventually mean big gains in the future.
But taking advantage when it feels like stocks are in crisis mode… that’s easier said than done.
This is the state individual investors find themselves in today. Stock prices are down. But despite the opportunity ahead, these folks have been more bearish lately than at any other time in the last decade.
That doesn’t mean the bottom is in. But it does mean we’re getting darn close.
Let me explain…
Investors should be optimistic about future returns after the decline in prices we’ve seen. Instead, they expect the losses to continue.
That’s according to nonprofit research group The Conference Board. Each month, it surveys roughly 3,000 U.S. households to get their expectations on the market.
The survey asks folks if they expect stocks to rise or fall from here. And today, more people expect losses than gains.
Specifically, if we take the percentage of bullish folks and subtract the bearish percentage, we get a reading of “net bullishness.” By this measure, retail investors are the most pessimistic they’ve been in a decade. Take a look…
In May, just 28% of respondents thought stocks would head higher. Meanwhile, nearly double the number of folks – or 43% – thought stocks would head lower.
That’s the highest bearish reading since 2011. And it led to net bullishness of negative 15%, the worst since 2012.
Simply put, investors are incredibly pessimistic about stocks right now. But this sentiment indicator is a powerful contrarian tool…
We’ve only seen more extreme readings than this during five other market environments. Those included the global financial crisis, the post-tech-bubble bottom, and the early-1990s recession.
In each case, stocks eventually stormed back… The gains coming out of those bottoms were some of the largest on record. And it all started with losses and bearish sentiment.
Of course, things can get worse from here. After all, as this chart shows, we’ve seen much lower levels of net bullishness than what we have today. But we’re already at a historical extreme. That’s a good thing for contrarian investors.
Folks only get this bearish after stocks take a beating… when the future opportunity is brightest. That doesn’t mean the bottom is in. However, history shows it’s likely getting close.
Good investing,
— Brett Eversole
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Source: Daily Wealth