Market Update November 2021 – Bulls & Bears on Even Terms


The anatomy of the global markets’ recovery following the COVID-induced March 2020 sell-off has been unprecedented in many ways.  Certainly, the hard stop was quite different than that of the financial crisis in 2007-2009, which took fifteen months for a market bottom to be found.  And the market decline in 2000-2002 was also quite different with heavy speculation as the culprit, resulting in a bear market that took nearly two and a half years to find a bottom.  Both the 2000-2002 and 2007-2009 periods were driven by excesses that had invaded the economy and required time to reset both business and personal finances. 

But 2020 was a hard stop in the midst of a relatively healthy economic cycle.  While different than the prior two bear markets of this century, 2020 may still be an example of the saying that “markets never repeat themselves, but they often rhyme”.  And some have suggested that the COVID catalyst “rhyme” may be more similar to that of the mid-1900’s wartime market than that of economic crises earlier this century. 

If so, then a quicker rebound would be somewhat expected with demand recovering more quickly than supply, particularly if fiscal authorities take action to fuel the demand side while monetary authorities promote policies to keep costs (e.g., interest rates) low.  Putting this all together, today’s economic recovery and demand for risk assets would seem to be reasonable outcomes.

And we have seen these outcomes, even to the degree that some investors are now expressing concerns regarding equity markets having risen too far, too fast.  What is the proper perspective?  That the S&P 500 Index as of October 31, 2021 is up 80+% since March 31, 2020? Or that its up 23% since December 31, 2019?  How about that the index has returned annualized gains over the prior five years of 18.9%?  Or, that annualized gains for the 20 years ended October 31, 2021, remains a relatively modest 9.8%?  Have recent years been a “catch up” period or one of excess?  Or does it matter?  Probably not!  What’s more relevant going forward is how prices today relate to the asset values, a combination of current earnings and expectations for the future.  And earnings gains have been robust. 

But, if market eras can “rhyme”, what about today?  The “war time” paradigm may relate with the idea of a hard economic stop followed by a relatively quick restart once resources are redeployed to the US economy, similar to this era’s “reopening”.  And inflation was also a concern during this time, one of the possible hindrances on investors’ minds today.  While inflation did exhibit some volatility in the post-war era, it was not until the late-1960s/1970s that inflation became a more systematic impediment to the economy and the markets.  Yes, changing inflation expectations can cause heightened volatility, but this paradigm suggests it’s more noise than risk at this phase of the recovery.  Watching these items for changes in the undercurrents will be important, should they stray from the current trend.

To apply this to today’s markets, there are two dynamics at work.  Earnings are strong and the outlook is for further strength, yet expectations of this strength have also risen, likely tempering the rate of growth in equity markets.  Inflation and interest rates are likely to rise further.  This is not a problem in itself as these are also good signs confirming business strength.  The risk is not in the direction, but rather the speed and magnitude of this trend.  An orderly rise in interest rates would not necessarily be an impediment to the economy or the equity markets.  But a sharp spike in inflation or interest rates would be a risk to the broader capital markets.

Close attention to these matters will need to be paid through year-end as outlooks for 2022 begin to provide a better perspective for the coming year. 

CHART OF INTEREST – Bulls & Bears on Even Terms

As markets continue to make new highs, the selloff in early 2020 is far back in the review mirror.  For months sentiment was cautious regarding the rebound.  But somewhere during this period, the market environment and investor sentiment turned towards enthusiasm over a new leg in the bull market.  And now, following a strong 2021 to-date, we are beginning to hear questions asking if markets have gone too far, too fast! 

With the S&P 500 Index now up 21.9% from its February 2020 high and 111% since the March 2020 low it’s not surprising that this has caught the attention of investors.  As markets continue to make new highs, it’s not surprising that investors are asking if markets have now gotten ahead of themselves.  If so, does this alone raise the likelihood of a pullback?  We’ve seen it before, and we’ll see it again in the capital markets as price discovery often overshoots on the downside and the upside.  And investor sentiment often follows the same pattern, with caution turning to optimism and eventually euphoria, only to take markets too far, too fast and setting up a correction, a cycle that is historically well documented. 

Can the magnitude of market gains be used as a helpful indicator of investor sentiment?  Large gains themselves are not necessarily a sign of a coming correction, particularly if the environment is accompanied by healthy earnings and business conditions.  But with the scars of 2020, we are now hearing more comments that markets are ahead of themselves, and investors are overly optimistic, conditions which would warrant caution.  But is this the case?

Jim Paulsen at The Leuthold Group recently provided the accompanying chart, looking at sentiment through the Conference Board’s Consumer Stock Market Survey released in late October.  This survey is based on a sample of approximately 3,000 households and the chart shows the percentage that expect stock prices to rise, less those that anticipate stock prices to decline.  With a reading of four, the survey is much closer to a balanced opinion by consumers, a condition more likely to support healthy markets than that of an imbalance.  And, for further perspective, this recent reading is well below other notable periods in time preceding larger selloffs.

Looking at 1988 to present, it’s clear that today’s measure of this sentiment gauge points to a healthy caution held by consumer investors (i.e., individuals).  Yes, the market is making new highs.  But, while no single datapoint will provide the full answer, this survey suggests that the danger of euphoria is far from today’s sentiment.

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