Commentary by Joe Clark
Today’s market environment ranks among the longer bull markets in history, prompting many professional investors to reduce equity exposure and in some cases even move to cash. Indeed the market is more expensive today based on price to earnings ratios compared to 1996, when Alan Greenspan uttered the phrase “irrational exuberance.”
But then again, the late 1990s market marched forward for three more years before dramatically correcting.
The recent sentiment reading from Barons found the most bearish results in the last 20 years, with more than two-thirds of professional investors expecting more downside risk. But that finding is actually good news! When people are content, they have all their money invested – until something happens to prompt them to sell stock, thus driving the stock market down. But when people are sitting on cash, they can put their money to work driving the market higher.
A few weeks ago, the total return for the S&P 500 actually hit a record high, yet $4.5 billion flowed out of equity ETFs and mutual funds that week. Money flows have been negative in 13 of the past 16 weeks; longer than any period in the Great Recession of 2007-2009.
The bearish sentiment stems in part from valuation, but also considers the duration of an economy’s expansion. Janet Yellen was asked when the economy would rollover, and her response was essentially that economies don’t go into recession because of age. Research conducted by Glen Rudebusch supports her remarks. Prior to the World Wars and the U.S. economy’s growth driven by manufacturing, the nation tended to slip into recession more frequently. Looking at history since the mid-century, we see a different story emerge. There have been three expansions longer than the current one. The 1991-2001 expansion was the longest, followed by 1961-1969 and 1982-1990. Each expansion supports Yellen’s statement.
Is the market primed for a correction? Possibly. But there is also a chance that correction could present a buying opportunity. Keep in mind that markets and economies are two distinct beasts.
Joseph “Big Joe” Clark is a Certified Financial PlannerTM and the Managing Partner of the Financial Enhancement Group, LLC an SEC registered Investment Advisor. He is the host of “Consider This” found on WQME Saturday mornings at 9 and is a former Adjunct Assistant Professor at Purdue University where taught the capstone course for a degree in Financial Counseling and Planning. Securities offered through World Equity Group, Inc., member FINRA/SIPC, a broker dealer and SEC registered Investment Advisor. Advisory Services can be provided by Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated and are not affiliated. Big Joe can be reached at [email protected], or (765) 640-1524.
