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In the Markets Now - Historic Bearishness Thumbnail

In the Markets Now - Historic Bearishness

In the Markets Now - Historic Bearishness

(Baird’s Ross Mayfield, CFA wrote the following piece in April 2022) 

The Market Outperforms When Negativity Abounds

If you find yourself feeling especially negative about markets lately, you’re not alone. In fact, some measures of investor and consumer sentiment have become historically pessimistic in the last few months. And between war in Ukraine, record inflation, house prices skyrocketing, Covid lockdowns in China, and the prospect of rapidly rising interest rates, you might be forgiven for feeling that way. The good news about all this bad news, however, is that stock market returns tend to be especially strong when starting from periods of elevated uncertainty, heightened fear, and/or extreme bearishness. Let’s take a look.

The data we’ll reference is from the American Association of Individual Investors, which has run a weekly survey since 1987 that simply asks, “Do you feel the direction of the stock market over the next six months will be up (bullish), no change (neutral) or down (bearish)?” This is one of the more common ways that investors gauge current sentiment. And, well, investors aren’t exactly optimistic: per the survey (see our chart), there haven’t been so few “bullish” investors in thirty years. Just as a refresher, that stretch includes the dot-com crash, the 2008 Financial Crisis, and the Covid-19 pandemic.

But the other thing our chart shows is that equity returns from periods of elevated bearishness tend to be outstanding. The average 12-month return from these periods is double the all-period average, and perhaps more importantly, the hit rate for a positive return is nearly 100%. You might not always get the 20% return over twelve months, but you almost never lose money – and that’s half the battle.

As it turns out, a great time to be bullish is when everyone is bearish. Or, as the saying goes, “be greedy when others are fearful” (or “buy when there’s blood in the streets” if you prefer a more dramatic version). One doesn’t have to be a contrarian to be a good investor, of course, but knowing that returns from these dark moments have historically been so strong might just keep investors from bailing out at the moment of peak negativity. Time in the market has been a winning strategy over the long haul.

Of course, all of this easier said than done – people are never fearful or pessimistic for no reason. Wars, financial crises, pandemics, inflation – things can get, and have gotten, really scary. And it may yet take more time before the smoke begins to clear. But as they say, the night is darkest just before dawn, and the strong returns from periods of peak negativity should be comforting to investors in the highly uncomfortable environment we find ourselves in today.

This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy.

This report does not provide recipients with information or advice that is sufficient on which to base an investment decision. This report does not take into account the specific investment objectives, financial situation, or need of any particular client and may not be suitable for all types of investors. Recipients should not consider the contents of this report as a single factor in making an investment decision. Additional fundamental and other analyses would be required to make an investment decision about any individual security identified in this report.

For investment advice specific to your situation, or for additional information, please contact your Baird Financial Advisor and/or your tax or legal advisor.

Fixed income yield and equity multiples do not correlate and while they can be used as a general comparison, the investments carry material differences in how they are structured and how they are valued. Both carry unique risks that the other may not.

Past performance is not indicative of future results and diversification does not ensure a profit or protect against loss. All investments carry some level of risk, including loss of principal. An investment cannot be made directly in an index.

Copyright 2022 Robert W. Baird & Co. Incorporated.