Investors began this decade feeling uncertain about the nascent stock-market recovery – and 10 years later, the mood remains far from ebullient, with global trade, Brexit and an aging economic cycle weighing on investor sentiment.
It’s hard to argue with success: Through 10 years of simmering concerns, reflected in the popularity of bonds, rising gold prices and bearish-looking sentiment surveys, equity markets (especially U.S. stocks) have roared.
“For most professional investors, it was a market that they did not trust. It was a hated market, all the way up,” said Kevin McCreadie, chief executive and chief investment officer at AGF Management Ltd.
In 2010, the stock market was in its early stages of recovering from the devastating bear market of 2008 and 2009, which left a lasting impact on investors.
But there were other factors at work. The U.S. Federal Reserve had cut its key interest rate to zero in 2008 and had initiated an unconventional bond-buying strategy, known as quantitative easing, between 2009 and 2014 – which didn’t exactly ignite confidence in the economy. Europe suffered through a debt crisis, Greece required a bailout and Britain voted to leave the European Union, raising uncertainties about the world’s second-largest economy.
Gold, a traditional haven investment, peaked at US$1,900 an ounce in 2011, reflecting unease; it traded at six-year highs earlier this year. And Mr. McCreadie noted that the yield on the 10-year U.S. Treasury bond began the decade at about 4 per cent and will end it under 2 per cent, as bond prices increased.
“With people pouring money into yields that look like that, they weren’t doing it for the return; they were doing it from the safety aspect,” he said.
Surveys back up this observation. The American Association of Individual Investors (AAII) has polled retail investors on their outlook for the stock market every week since 1987. Annualized results show that six years over the past decade (2012 and 2015-2019) were among the 12 lowest-sentiment readings since the polling began. In particular, 2015 and 2016 reflected lower investor sentiment than 2008 and 2009.
Charles Rotblut, financial analyst at the AAII and editor of the AAII Journal, said the bull market hasn’t been hated, but it has been unloved.
“We have not seen investors grasping the bull market. I think part of it is ongoing economic angst, and not just in the United States but worldwide,” Mr. Rotblut said.
The Vanguard Group uses in-house “risk speedometers” to gauge risk appetite by looking at cash flows into equity and fixed-income assets.
According to Todd Schlanger, senior investment strategist at Vanguard Investments Canada, Canadian risk appetite was low at the start of the decade, recovered briefly to above-average levels midway through the period, but has since slumped to average or below-average levels – even as 2019 looks set to deliver strong double-digit returns.
“Generally, risk appetite tends to trail performance of the equity markets. There’s usually lag to that,” Mr. Schlanger said, where sentiment trails performance by about 12 months.
He added: “In the short term, investor sentiment can play a role. But that tends to wash out over long periods, and markets tend to resemble the fundamentals.”
This may explain why stocks soared even as investors have remained relatively cautious. The S&P 500 is up 184.4 per cent for the decade so far (with several trading days left), and 249.7 per cent with dividends (in U.S. dollar terms). Canada’s S&P/TSX Composite Index has lagged, but the gains are still impressive, at 45.7 per cent and 95.1 per cent with dividends.
“Investors were generally bearish, not bullish, and that sentiment backdrop helped propel the bull market,” Richard Bernstein, CEO of Richard Bernstein Advisors, a New York-based investment manager, said in a recent note.
He believes that’s changing though: He said investors are now favouring economically cyclical stocks and chasing momentum strategies, while flows into equity exchange-traded funds are picking up speed.
“Investors might not be ebullient, but their behaviour is increasingly typical of late cycles,” Mr. Bernstein said, contributing to his rising caution toward stocks.
David Berman