“How low can stocks go,” the Wall Street Journal wondered on March 9, 2009, as the financial crisis was wiping away trillions of dollars from American equities, the deepest rout since the Great Depression.
That day, of course, marked the bottom. The bull market that celebrates its seventh anniversary today has restored $14 trillion to stock values, pushing up the Standard & Poor’s 500 Index by almost 200 percent.
“This pervasive pessimism, skepticism and unwillingness to invest in equities anywhere near the degree we’ve seen in past bull markets has been a very unique characteristic,” Liz Ann Sonders, chief investment strategist at Charles Schwab & Co., said on Bloomberg Radio. That contrarian sentiment constitutes “the wall of worry that stocks like to climb,” she said.
Yet when people withdraw money, stocks inversely tend to rise later, according to data since 1984. In the 12 instances when funds experienced monthly outflows that were at least 2 standard deviations from the historic mean, the S&P 500 rose an average 7.1 percent six months later, compared with a normal return of 3.9 percent, data compiled by Bloomberg and Investment Company Institute show.
But once things start to turn around, bears will be forced to buy. From Feb. 11 through Monday, a Goldman Sachs Group Inc. index of the most-shorted companies outperformed the S&P 500 by almost 16 percentage points, the most in data going back to 2008.
That’s the case with financial shares, which led the latest rebound from the February low. Banks and insurers, the biggest profit generator in the S&P 500 with $228 billion in income last year, still get little respect from investors after being blamed for the market turmoil during the downturn. At 13.6 times earnings, the group was handed the lowest valuations among 10 industries and traded at a 24 percent discount to the S&P 500.
As the market started to recover, financial companies rallied. So did some of the most-hated stocks such as energy and materials producers that had been borrowed and sold in a practice known as a short sale. The forced buying from bears therefore added additional fuel to the S&P 500’s gain from a 22-month low.
Tom Mangan, senior vice president of James Investment Research in Xenia, Ohio, which oversees about $6.5 billion, isn’t ready to throw in the towel.
“There are too many bears versus bulls, and there is too much cash on the sidelines,” he said. “That means the market can do better.”
— Check out Are We Headed for Recession? on ThinkAdvisor.