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If the pain of taking a loss on one of your investments is bigger than the joy of making a profit, pat yourself on the back: It could be a sign that the bull market has some life left in it.
Economists and market watchers have been studying the so-called "asymmetry" between views on investment losses and gains for years. But Richard Bernstein believes the level of asymmetry can shift with the market cycle, and can help us determine the direction of the stock market.
In his latest market commentary, Mr. Bernstein – a former strategist at Merrill Lynch and now chief executive and chief investment officer at Richard Bernstein Advisors – noted that in the early stages of a typical market cycle investors are far more fearful than usual about losses.
Then, as the bull market takes shape and stocks show strong returns, investors shed some of their concerns; by mid-cycle they are more accepting of risk.
And as the bull market ages and stocks continue their ascent, investors overcome their fears altogether under the belief that there is no downside risk. Sadly, this no-fear attitude tends to mark the peak of the good times and the start of a bear market.
Where are we now? According to Mr. Bernstein, it is hard to see any full-blown risk-taking among investors beyond specific sectors such as social media and biotechnology.
"Data clearly show that no group of investors is currently willing to take excessive U.S. equity risk," he said in his commentary. "Pension funds, endowments, foundations, hedge funds, individuals, Wall Street strategists, and even corporations themselves remain more fearful of downside risk than they are willing to accentuate upside potential."
That's good news, because it suggests that the end of the market cycle – where investors are euphoric – is not yet upon us.
David Berman