It's often said that the bull market that began in 2009 has been the most hated in history, with sceptical investors never displaying the kind of exuberance associated with past market rallies. That wariness is growing, judging by Merrill Lynch's latest monthly fund manager survey.
Cash levels have jumped to 5.8 per cent, a level seen on just two occasions over the last 15 years – after June’s Brexit vote and in November 2001, following the 9/11 attacks. Ordinarily, a contrarian buy signal is triggered when cash levels exceed 4.5 per cent, says Merrill. The current reading is quite remarkable; one expects such levels during market crises, not when indices are near all-time highs.
Merrill’s survey is not an outlier. Retail sentiment surveys have been muted for 12 months, while Barclays data indicates global equity funds have seen $128 billion in outflows since mid-March.
Obviously, bearish sentiment doesn’t mean stocks must rally. However, any easing in investor concerns – US and European political stability, the potential for a crash in bond markets and corporate earnings are among the main issues – would likely see that cash being put to work.
Bull markets die from exuberance, not scepticism, suggesting the current rally is a long way from topping out.
El-Erian’s timing mishaps
One investor who is particularly keen on cash is Allianz chief economist Mohamed El-Erian. Alarmed by global central banks' interventions in financial markets, El-Erian last week said cash accounted for about 30 per cent of his own portfolio, warning that "this is a better time to be a seller of stocks than a buyer".
El-Erian is not some intemperate perma-bear. The former chief executive at bond giant Pimco is one of the most influential names in global finance, and prudent investors should not dismiss his warnings of price distortions caused by central banks.
However, investors should be equally cognisant of the perils of forecasting and market timing. “Time to put 30 per cent of your assets in cash: El-Erian,” headlined CNN on January 28th, less than two weeks before markets bottomed after a heavy sell-off. “El-Erian says world is on eve of another financial crisis,” headlined Bloomberg in September 2011, just weeks before a major market bottom (stocks have since doubled).
“We’re on a sugar high,” he said in December 2009, when warning that stocks would suffer a quick double-digit correction. “It feels good for a while but it’s unsustainable.”
El-Erian is a very smart, experienced investor, but calling the markets is a treacherous business. By now, he should know better than to be using the language of market-timers.
Failing on financial literacy
Are you financially literate? Here are three simple questions to confirm you know the basics.
You put €100 in a savings account earning 2 per cent annually. How much would there be at the end of the year – €100, €102, or €120?
How much would be in the same account after five years – more than €110, exactly €110, or less than €110?
True or false: It is usually possible to reduce investing risks by buying a wide range of stocks and shares.
Answers: €102, more than €110, true.
Basic stuff, yes? Apparently not. According to a new OECD financial literacy survey covering 30 countries, just 58 per cent of people answered the first question correctly; 42 per cent correctly answered the second question; while more than one in three people didn't realise one could reduce risk via diversification.
In total, participants were asked seven questions, with almost half – 44 per cent – getting at least three questions wrong. Irish people were not included, but our neighbours in the UK were, scoring below the overall average.
The case for long-term investing is simple: reduce risk by diversifying and watch your returns snowball over time due to the magic of compound interest. Alas, it seems all too many are unaware of these basic truths.
Investors losing faith in Trump
Donald Trump’s recent meltdown has hurt his standing with ordinary investors, according to an ETrade poll of almost 1,000 active traders.
Sixty per cent said a Hillary Clinton victory was better for stocks, versus 40 per cent for Trump. That's a sizable change in sentiment; there was only a very slight differential separating the two candidates in an earlier ETrade poll.
Still, it’s remarkable that even now, 40 per cent apparently believe that financial markets would actually cheer a victory for a candidate as reckless and incompetent as Trump, given the ludicrous depths to which his campaign has plummeted.
One investor not keen on either candidate is billionaire hedge fund manager David Tepper. "You have one person with a questionable judgment and the other person who may be demented, narcissistic and a scumbag," said Tepper. "I'm not saying which one is which. You can make your own decision on that".