This morning, I want to direct your attention to a Bloomberg News article titled Individuals Pile Into Stocks as Pros Say Bull Is Spent. It is a worthwhile read, but a bit of context is required.
The article notes that Main Street and Wall Street are allocating money in diametrically opposed ways:
Individual investors are plowing money back into the U.S. stock market just as professional strategists say gains for this year are over. About $100 billion has been added to equity mutual funds and exchange-traded funds in the past year, 10 times more than the previous 12 months, according to data compiled by Bloomberg and the Investment Company Institute.
At the same time, various big-name forecasters are predicting the “stock market will be stagnant.” They further observe “valuations are at four-year highs.”
Individuals pile into equities while the pros pull out? The knee-jerk response is to run for the hills, or Treasuries, or whatever your favored disaster trade might be.
Unfortunately, it is never quite that simple. A little bit of context explains why neither of these indicators is of much significance.
Let’s begin with the forecasting portion of our discussion. The abilities of strategists and economists to foresee the future run from merely horrible to embarrassingly foolish. Someone gets it right each year more or less at random, but there is little reason to put much faith in the predictions of the pros. As we discussed last week, expert forecasts are statistically indistinguishable from random guesses. And, there is little or no penalty for being wildly inaccurate.
The joke on trading desks was that the World Cup predictions from investment banks were meant to make their analysts’ calls look prescient.