Charles Rotblut is a vice president with the American Association of Individual Investors. He is editor of the AAII Journal, helps to manage the Stock Superstars Report portfolio, and authors the weekly AAII Investor Update newsletter. A Chartered Financial Analyst, Mr. Rotblut has analyzed both publicly traded and privately held companies. His experience includes working for Zacks Investment Research, an investment research firm; INVESTools, an investment education company; Curian Capital, a money management firm; and McClure, Schumacher & Associates, a business valuation firm. Mr. Rotblut’s book, Better Good than Lucky: How Savvy Investors Create Fortune with the Risk-Reward Ratio, was published in November 2010.
Fear of returning to 2008 conditions is ironically helping boost the markets, says Charles Rotblut of AAII, who explains what his company's sentiment indicators are saying right now.
Why do we hate this rally? We are here with Charles Rotblut, who is going to talk to us about your sentiment indicators. Why do we feel so bad about the fact that the S&P 500 is up 16%?
Sure. I think the big fear is the uncertainty. A lot of people don’t know what is going to happen in Washington. We are facing a combination of higher tax rates and budget cuts. We have Europe unresolved—Spain, Greece, Portugal, Italy. Will they default?
Also, people are looking at the economic data. They are seeing that the economy is still slow, signs that China is still slowing down. And I think one of the big things that makes this current recession worse than a lot of others, even though now we are in a period of growth, is so many people know somebody who has either seen their house gone down in value, has lost a job, is struggling now.
I think all of these events are weighing on investors' minds. For many investors, there is a fear out there that another shoe can drop. They could see what could cause the shoe to drop, but they don’t know when it is going to happen—and they know they don’t want to go back through the pain of 2008.
So, to a certain extent, this isn’t...we are not recovering from a thunderstorm, we are recovering from a tsunami. And even though the wave is gone, there is still destruction that is out there, that is palpable and visible to a lot of investors.
Yeah, absolutely. And even in that scenario—say their house got rebuilt—they know other houses that haven’t been rebuilt, and the pain is still there. As humans, we have a natural aversion to loss, and for our ancestors, that kept us alive...but, as investors, it is not always healthy.
Really, as investors, the best thing to do is to fight that aversion and realize that when everything is being knocked down and everybody is losing money, that is the time you should look under your couch cushions and look around and think to yourself, what can I buy? It is the exact opposite of what our emotions tell us, but that truly is what buying low and selling high is.
Right, and I think that is where the rational mind comes in, because the stock market isn’t that emotional when it comes right down to it. But, you were mentioning something earlier about your weekly sentiment indicator. That was an interesting point.
Yes. Right now, in our weekly survey, we asked members are they bullish, do they think stock prices will rise, or are they bearish and they think stock prices will fall over the next six months.
This week, we actually see bullish and bearish sentiment about equal, about 33% each, and this is only for the second consecutive week we have seen the spread between the bulls and the bears be less than one percentage point. It is only the third time in the history of the survey we have seen it, and it is the first time since 1993 that we have seen this happen.
At the same time, we have seen bear sentiment below average for about 26 out of the last 27 weeks, so we are seeing investors really not be optimistic, really not buy into the rally.
And considering that the S&P 500 is up 14%, it is pretty significant that investors aren’t thinking it is a good year for stocks. I want to be in stocks. Rather, we are seeing investors pulling money out, or at least being fearful about that shoe dropping.
And it is odd, because there is no place to really put money that you are going to get anything for it. You can’t put it in the bank and get a nice CD rate out of it. I mean, you are really just sticking it under your mattress to a certain extent.
Yeah, absolutely. Anyone who has a savings account is groaning about their interest rate. If you look at bonds and you look at stock yields—and that is one measure; Benjamin Graham, the father of value investing, said look at yields and buy the asset with the higher yield—right now, stocks have a very wide margin over bonds.
Bonds are still important for preserving wealth, but when you look at yields, it makes a compelling statement to own stocks, and really to be buying stocks now for the long term, even if it means riding out a little bit of volatility.
But I think people are so loss-averse, particularly after 2008—and that is still so fresh in their minds—they are fearful. I think for a lot of young people, someone who turned 20 or 22 in 2000, all they have seen is two bear markets and two recessions. They don’t know what it is like to have this very strong, raging bull market.