Thursday, February 17, 2011

Is Anyone Not Bullish On Stocks?


If so I am having trouble finding one.

I just returned from an investment committee meeting of a small endowment. Like so many other meetings these days, most of the discussion revolved around about adding to equities, and selling bonds.

This may be the right move (as an equity manager, I sure hope so!) but it worth a look back at history. Investing with the consensus is rarely a profitable move, so the rampant bullish sentiment is definitely a cause for concern.

I went back to some of the blog posts I made about a year ago in Random Glenings.

Here's an excerpt from dated March 19, 2o10 that I found interesting (the full link is posted below). I had just come back from attending an investment conference sponsored by the brokerage firm UBS, and here's what I found:

What I was struck by, however, was the overwhelming consensus of the "correct" investing strategy at this point in the market. Everyone, it seems, is fleeing stocks (especially US stocks) in favor of bonds and alternative investments. And everyone "knows" that interest rates are heading significantly higher, and so are keeping their portfolios structured accordingly...

So when I think that stocks in the US can move higher, and interest rates lower, I recognize that this is a minority view, which gives me another reason to believe that events should unfold as I anticipate.

With that background, here's a report on pension investing from Merrill Lynch. Their survey work is in line with what I heard earlier this week (I have added the highlighting):

Volatility reduction on the mind…

Currently, we see a significant overall desire to reduce surplus volatility within
corporate pension plans. This will typically be achieved by the continuing sale of
equities and buying of bonds....

…but rate triggers will ultimately determine moves

However, the belief among many larger plan sponsors that rates should rise is
having the most profound effect on delaying implementation. Many large plan
sponsors are on the sidelines waiting for rates to rise and are prepping
implementation when interest rate triggers are met. We believe when a plan
sponsor is comfortable and their rate trigger has been met they will begin a
meaningful shift away from equities into long-duration fixed income securities.

Forecasts imply increasing long-end rates…

Nearly every rate forecaster in Bloomberg’s current rate forecast survey believes
we should see increasing long-end (10- and 30-yr) Treasury rates in the future.
So overall, while the need to hedge surplus risk among plan sponsors seems
widespread, the timing of a sizable duration extension is tactical. Many plan
fiduciaries are holding off on an extension in the belief that interest rates will rise.


Consensus Views (cont.)

So where are we now? Well, interest rates are lower than they were a year ago, and stocks are much higher.

I would particularly highlight the fact that so much financial planning assumed a year ago that interest rates would be much higher today. This was obviously a costly assumption.

And I would also note that a lot of institutional investors and their advisers were fleeing stocks a year ago, and have missed a good portion of the recent stock market rally. Today they are going back to the equity market - but are they too late?