INVESTOR PESSIMISM NEAR EXTREME LEVELS
By Gus Krafve
February 29th, 2008
The individual investor has not been this bearish since the stock market bottomed in 2002-2003. The data, according to a recent survey by the American Association of Individual Investors, which has 150,000 members, measured the number of Bears at 45.3% and Bulls at just 34.3% as of February 27, 2008.
Frankly, there does not seem to be much to get excited about these days. Weakness can be seen in both the economic data and in the capital markets. Nationally, the housing market has fallen deeper into a recession with negative spill-over effects to the rest of the economy. Unemployment is still low by historical standards, but it has started to rise and is currently at 4.9%. Consumers are also worried about a looming recession, which combined with these other factors, has led to a slowdown in consumer spending.
Inflation is also a concern on the investor’s radar. The Consumer Price Index came in at 4.3% in January versus 2.5% a year earlier. Upward pressure will likely persist on inflation this year, as many commodities are hitting all-time highs. Federal Reserve officials have recently noted upside inflation risks, but remain focused on downside risks to growth in the economy. This focus on growth means more rate cuts are very likely.
With all of the negatives in the economy and in the markets, the obvious question is “why would one want to be invested in stocks?”
The monetary and fiscal response by the Federal Reserve has been strong. The Fed has cut rates by 2.25%, and many economists predict they will cut an additional 1% by June, bringing the Fed funds rate down to 2%. Lower rates should help the economy by cushioning the blow to the housing sector, preventing an even bigger deterioration in the credit markets. Historically, stocks have reacted very favorably to aggressive rate cuts by the Fed. In addition, the $168 billion fiscal stimulus plan will provide a temporary boost to consumers. Rebate checks will be mailed out in late spring and should increase consumption in the third and fourth quarter.
History also tells us that long-term investors make the most money when they buy stocks during periods of time when the individual investor is overly pessimistic. Understandably, it can be uncomfortable to buy stocks when “the sky is falling.” Conversely, investors are much more at risk of losing money when they buy stocks during periods of time when they are overly optimistic, which is what happened immediately before the crash of 1987 and the bursting of the technology bubble of 2000.
