It's been remarkable how quickly the prevailing mood among investors has turned sour.
It was only two months ago, in April, when my biggest concern about the stock market was the high degree of bullish sentiment.
At that time, a number of surveys indicated that nearly 75% of investors surveyed were positive on the outlook for stocks. Meanwhile, nearly the same percentage of investors were bearish on bonds - most were looking for long maturity Treasury bond yields to soar.
Then the correction came, and stocks are now off about -8% from their spring peaks. And, predictably perhaps, surveys now indicate that bearish sentiment is as high as the lows in the summer of 2010.
We all know the bearish story: Housing is still crumbling; unemployment is too high; and the federal government is gridlocked. Investors find 0.37% yields on Treasury notes preferable to stocks yielding 3% or more.
I've been telling clients a five reasons not to turn to cautious:
- I've been using the "Cyrano Principle" argument that I have discussed earlier this week. Yes, there are lots of problems in the world, but they are always fairly well-known. In my opinion, the capital markets are already reflecting a good deal of bad news;
- What are the alternatives to stocks? It is hard to make a long-term investment case for bonds yielding less than 2%, and money market fund yields are essentially nil.;
- I also find it interesting that the uber-bears on the economy and stocks have no problem piling into corporate bonds; if the world is really going to implode, corporate credit will get smacked along with the stocks. Buying single-A rated corporate bonds yielding 2% (which is about where they are trading) doesn't give you much downside protection;
- Valuations on most large cap stocks are reasonable, if not downright attractive. This morning's Financial Times notes that Apple is trading at 13x earnings, despite the fact that Apple's sales are expected to grow by 60% this year. IBM, by comparison, is also trading at the same 13x P/E ratio, but sales growth is expected to be one-tenth of Apple's.
- The "nightmare" scenario that most of us remember - the extreme bear market of 2008 - occurred in a world that was blithely unaware of the subprime mortgage risk that was lurking in the financial system. If anything, investors today are almost entirely focused on risk;
- Earlier this week Bloomberg noted that stocks are trading at their cheapest valuations since 1985 - is this the time to flee to the sidelines?