It is inevitable that when prices in any investment market make new all-time highs that talk from the so-called investment experts turns pessimistic. While it is prudent to take a good look during these times at the market metrics and valuations regarding risk, turning gloomy is not always warranted.
As market values continue to rise, we review our notes from what we have experienced over the past thirty five plus years to compare similar times for perspective. We also contact other professionals that have been around much longer and have proven track records of success and compile their views. What we have found is that there are many similarities that this cycle has with those that have preceded, but there are also numerous differences that will most likely change the investing landscape.
First, the attached graph of the fear, hope and greed cycles remains a staple of the emotional stages of market movement over time. We feel that March of 2009 represented the final point of despondency and the emotional sell decision for many investors. Since that period, the equity markets have rebounded to the current new highs, but stocks are still unloved by most and more money continues to pour into defensive bond instruments than stocks. The consensus opinions we value is that investor attitude is approaching the relief, or maybe even the optimistic stage of the cycle. The late Sir John Templeton is quoted on saying “Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria”. We may have quite a long period of growth ahead if our place in this cycle is correct.
This recent run in market prices has not taken prices to being over valued by historical standards. Current earnings expectations are low and have been reduced looking forward. As we start a new earnings reporting season this month, so far that pessimism is not playing out. Earnings are holding up well with those reporting so far, and there is a good possibility for surprises to the upside. We are seeing very strong buying on days when the markets are down and this suggests that investors, including professionals, are more concerned about missing the next up leg than getting caught in a decline.
Some statistical information on how the investment landscape has changed is also helpful in our analysis. There has been a noticeable reduction in the number of public companies traded on the exchanges over the past 15 years. In 1997, there were 8,823 public companies versus 5,091 in 2011. Between 1980 and 2000, the average number of IPO’s (initial public offerings of new companies) was 311 per year. From 2001 thru 2011, the average was 102. The cost of regulatory burdens of being a public company has caused many to go back to being a privately run business. American Greetings is a local example that has just been taken back private by the family. Public companies are also buying back their own stock in record amounts recently which takes huge amounts of shares out of the markets. If the investment attitude about stocks changes positively, imagine what will happen to prices as a large amount of cash chases fewer available companies.
As a conclusion of the research, history suggests that a decisive run to new all-time highs is more likely a sign for more gains to come rather than a trigger event preceding a massive decline.
As one of our esteemed asset managers has opined: The negative factors are clear to the average investor, and from them, he draws negative conclusions. But the person who applies logic and insight rather than superficial views and emotion, sees something very different.