11 months ago • 1 min
You’ve probably heard some version of this over the past few weeks: “with everyone so bearish now, stocks can only go up”. Here are two reasons why that’s a dangerous view.
First: you have to look at what people do – not what they say. Sure, sentiment (blue line) is at an extreme low. I mean, everyone’s saying they’re bearish, but then, they’re actually still heavily allocated to stocks (black line). In fact, their current allocation is way above thehistorical average (zero line, in gray). And if investors are overweight rather than underweight – as sentiment would suggest – then they’re much less likely to buy loads of stocks when sentiment improves. Put more simply, a 2002 and 2009 style-rebound – which happened after investors truly “capitulated”, or gave up on stocks – is a lot less likely now.
And second: even if people are bearish, they’re only mildly so: they’re expecting a mild contraction in earnings and stock prices. As such, a deeper recession still has the potential to catch investors by surprise and lead them to sell their stocks as they adjust their view. And since investors have historically tended to underestimate the magnitude of recessions, I’d say this is a risk worth bearing in mind.
Now, my point here isn’t that we will see a harsh recession. It’s rather that you shouldn’t buy stocks simply because the consensus is allegedly too negative. Chances are, it’s not.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.
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