Is rampant pessimism a reason for cautious optimism? Consumers are in a bad mood. Investors are too
Ditto for small business owners.
And with good reason: high inflation, persistent supply chain issues, Ukraine, and sporadic upticks in coronavirus.
However, there may be an investment silver lining to all this.
History tells us that when investor, consumer and business sentiment are very negative, it usually indicates a bottom in the market.
Some examples:
Consumer confidence: according to research by J.P. Morgan, the twelve months after consumer confidence hits a “trough”, or low point, the markets have tended to do quite well over the next twelve months. We recently hit such a trough. Since 1971 the eight troughs have been followed by an average 12 month return in the S&P 500 of 24.8%, while the twelve months following a peak in consumer sentiment averaged about a 4% return.(1)
Fear and Greed Index: This multi- faceted index has recently fallen into the extreme fear area, which is usually an indication that markets are reaching an extreme oversold status.(2)
Finally, The American Association of Individual Investors sentiment survey has Bears outnumbering Bulls by a 2 to 1 margin, an unusual level of pessimism in that survey.(3)
Of course, these are only indications, and no one has a crystal ball, but these types of readings do tend to occur near market bottoms.
More important is the fact that, as investors, we all need to keep our attention on the long term and understand that this type of volatility will happen from time to time. Remaining calm and patient in these types of environments, while not always easy, will likely pay off in the long run. The stock market has been one of the greatest wealth generators in all of history. Stay Strong!
- P. Morgan guide to the markets 2qQ 2022, Page 3.
- Cnn Money website, Fear and Greed Index of May 11, 2022.
- American Association of Individual Investors weekly sentiment survey 4/27/22-May11/2022
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. Investing is subject to risks including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss.
