Thursday, March 21, 2013

Crash, dammit

About 15 years ago, in 1997, the Economist magazine had a cover story they called "Crash, dammit".

Accompanied by a picture of a man falling from a skyscraper, the story in the October 15, 1997, issue described a sense of despair among a group of investors who were convinced that the market was due for a fall - but the market refused to cooperate, and kept moving higher.

Here's an excerpt from that piece:

WHETHER it be as tragedy or farce, the tendency of history to repeat itself is well documented. So it is not surprising that this tenth anniversary of the stockmarket crash of October 1987 finds some investors in a nervous state of mind. As this newspaper noted after that earlier crash, the 1982-87 bull market “was driven further and faster than any before, not just by economic confidence and cash-rich institutional investors but also by deregulation and wider share ownership.” It was, in other words, very like the present bull market. What, if anything, has changed? What has been learnt?

There are, in my opinion, some similarities between 1997 and today.

Then, as now, many investors are convinced that markets are moving higher based on irrational government policies and investors blind to the economic trouble that lie ahead.

This bearish group foresees a painful reckoning that almost surely will occur in the very near future.  Like the bears in 1997 - who kept referring to the 1987 market crash - today's bears are reliving the nasty bear market of 2008, telling anyone who will listen that disaster lies right around the corner.

The real problem, it seems to me, is that too many institutional and individual investors exited the publicly-traded markets after 2008, vowing never to return - and now stocks have fully recovered. 

Here's a comment from regular Random Glenings reader (and fellow portfolio manager) Rich Sipley:

Just catching up on my reading and I am looking at a recent strategas report that shows pension fund allocation towards equities has gone from 60% in 2005 to 38% currently.  Fixed income has gone from 27% to 41%.  I understand there are likely some demographic factors at work but it can not explain much of that move.  It looks like 'alternatives' have been the big winner...

And so today, with the S&P within a whisker of its all-time high, and equity prices up more than +26% since the beginning of 2012, many are hoping that we will soon see a correction - if only to give them a chance to get more fully invested.

Merrill Lynch's Steve Suttmeir made this observation earlier in the week:

Based on sentiment data from Investors Intelligence (II), 34% of newsletter writers expect a correction and this is near the 34.7% and 35.1% contrarian bullish peaks from early March and mid-November, respectively. With too many investors looking for a correction, the S&P 500 rallied from early March and mid-November and is similarly positioned as we move into late March. In our view, newsletter writers need to capitulate and remove their calls for a market correction in order to get a contrarian bearish sentiment extreme

In other words, it seems likely that many are quietly looking at the market's relentless rise and whispering "Crash, dammit!".