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I recently spoke at the Private Wealth Management Summit. And, boy, what a difference a year makes!
I spoke at this same summit last year in June 2022. Back then, audience members, my fellow presenters, and even the moderator found my prediction of a 10 percent rise in the S&P 500 over the next 12 months wild. I didn’t predict that the market would be up 30 percent. Not even 20 percent. Just 10 percent, a bit more than the index’s long-term average return.
And it wasn’t as if my colleagues expected merely a 5 percent return or even something flat. That wasn’t their challenge to my prescience. The crowd was absolutely positive that the stock market would practically unravel by June 2023. Well, guess what? The S&P 500 was up about 5 percent over that time. OK, so it didn’t hit 10 percent, but whatever. I got it directionally correct and relatively close in terms of picking a precise date and a level.
I mention this for two reasons. First, of course, vindication. I am not proud of that pettiness, but I admit it.
Second, part of the reason I felt the stock market would act counter to the opinion of my professional colleagues is that, at extremes, the crowd is often wrong. You’ve heard the saying, “The stock market climbs a wall of worry.” When people are worried, their cash sits on the sidelines and slowly finds its way back into the market as news becomes more positive. Last year, the crowd was in despair. Currently, the masses are less stressed, suggesting the stock market is not positioned for significant gains until it experiences a pullback—or, at least, that’s what my gut was hinting to me.
Last year, my gut told me that too many pros were too bearish to pile onto that trade. However, I fact-check my gut. A few hundred bearish investment professionals provided many anecdotes. However, the plural of “anecdote” is not “data.”
The Investors Intelligence U.S. Advisors’ Sentiment (IIAS) report is one of my favorite sentiment tools to gauge sentiment data.
The IIAS survey tracks the market views of independent investment newsletters. It reports the findings of professional investors who are bearish, bullish, or expect a correction. My first glance at the report is always the bull-bear spread (the difference between the number of bullish advisors and bearish advisors). The June 15, 2022 Advisors’ Sentiment spread was -13.3 percent (29.4 percent bulls, minus 42.7 percent bears). That compared to -11.6 percent in April 2022 after the COVID-19 market collapse. Historically, larger negative spreads mark safer times to buy socks.
With everyone at last year’s conference so incredibly bearish, I expected whatever new lows reached to be temporary. And that was the case, as the stock market went lower for four more months and has seemingly bottomed—at least, of course, for now.
For the week ending June 7, 2023, the Advisors’ Sentiment spread was +20.2 percent (44.5 percent bulls, minus 24.3 percent bears). That is its highest spread since November 2021, not long before the stock market experienced a brutal year of trading.
The S&P 500 has rallied 20 percent from its October 12, 2022 lows. Not much makes investors more bullish than higher prices. That June 7 reading was a massive surge from the May 31, 2023 spread of -7.7. My gut told me this was an interim blow-off top for the market, with a correction right around the corner. As I said, however, I fact-check my gut.
A jump of 27.9 spread points (from -7.7 to +20.2) is rare. There were only 21 other occurrences of the spread rising 25+ points without having done so in the six months prior, according to Bespoke. The historical average one-year return after those spread increases was 11.88 percent.
While the crowd is often wrong at extremes, it turns out that the opposite has historically been true when there are swift and considerable upsurges in sentiment. The surge in bullishness is a reason to hold equity allocations, not reduce them.
It is no coincidence that this jump in bullishness occurred as the S&P 500 confirmed a new bull market (on a closing basis) on June 8, 2023. A new bull market is defined as a rise of 20 percent. The index closed 20.04 percent above its October 12, 2022 closing low. It took 164 trading days to cross that threshold, the third longest stretch of the 15 occurrences since 1947. Historically, according to Bespoke, investors sold off stocks in the short term on that news.
One year later, however, stock returns were nearly twice as high after a new bull market started than during all other 12-month periods. And those periods experienced positive returns more frequently (85.7 percent of the time versus 72.5 percent of the time). I am no longer calling for an imminent stock market correction (an emphasis on “imminent” because they happen constantly and seemingly out of the blue). But if we get one, I may be prompted to reduce my hedged positions and get more aggressive in response to better (i.e., lower) prices.
Allen Harris is the owner of Berkshire Money Management in Dalton, Mass., managing more than $700 million of investments. Unless specifically identified as original research or data gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representations that any of the securities discussed have been or will be profitable. Full disclosures here. Direct inquiries to Allen at AHarris@BerkshireMM.com.
