Are Investors Really All That Bearish?

August 27, 2014

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Gallup released a very interesting survey on Monday discussing individual’s “awareness” of the recent “bull markets” strong gains. From Gallup:

“…the survey shows that while the majority of investors (64%) do know that stocks increased on average in 2013, barely a quarter (24%) believe they increased by 20% or better, and only 7% are aware that the average increase was in the 30% range. The largest proportion — 37% — believe stocks increased by 10%, while another 21% think stocks were flat and 9% think they decreased.”

I found this interesting. For those of us involved in the financial markets every day, we assume that everybody else is just as informed as we are. The reality is that most don’t.

First, the survey, as you would expect was directed only at individuals that have assets invested in the markets:

“The survey is based on a nationally representative sample of U.S. investors with $10,000 or more in stocks, bonds, mutual funds, or in a self-directed IRA or 401(k).”

However, this has to be put into some context, and there are several things that we already know about the average American.

1) Financial education extremely lacks even though money is a crucially important aspect of family lives. (Yes, “love” is extremely important, however, money ranks in the top 3 reasons for divorce.)

2) For most, money invested in the markets is primarily through company sponsored plans. Individuals mostly under-save in these tax-advantaged plans, only the minimum, and is often forgotten about.

3) They are more interested in watching “entertainment” according to recent Nielson survey’s which shows that the average American, over the age of 2, spends 34 hours per week watching live television and 3-6 more hours watching taped programs. The top 5 networks watched are all entertainment related for 18-49-year-olds with only Fox News hitting in the top 5 for all ages. When it comes to financial news, less than 1% watched a network like CNBC.

In other words, financial education and “interest in money” rank very low on the list of priorities.

However, is individual’s ignorance of last year’s market gains all that surprising? Probably not when you consider some of the financial statistics that surround the average American:

1) One recent study discovered that more than one out of every three adults in the United States has an unpaid debt that is “in collections.” That is a total of 77 million people.

2) 52 percent of American’s cannot afford the homes that they are living in currently.

3) 50 percent of all college graduates are relying on parents financially two years after college graduation.

4) 76 percent of all Americans are living paycheck to paycheck.

5) 26 percent of Americans have no emergency savings whatsoever.

6) Roughly 66 percent of all Americans do not have enough money saved up to cover six months of expenses if an emergency arose.

Furthermore, the National Institute on Retirement Security, recently published a study that showed that 4-out-of-5 working households have less than one times their annual income in savings. As they correctly labeled their chart – this is a retirement savings crisis.

I could go on, and the statistics are very compelling. Despite the “bullish calls” that the American’s are woefully underinvested and have “missed” out on the current bull market cycle, the reality is that most have little, or no, money to invest. However, for those that do, the surge, created by the Federal Reserve’s ongoing monetary interventions, has been extremely beneficial.

The inflation of asset prices has only impacted a relatively small portion of the overall population which explains why the “wealth effect” has had a relatively muted effect on the overall economy.

Investors Are So Bearish; It’s Bullish

The Gallup survey goes on to show that most investors are nervous about investing in the financial markets.

“The cautiousness seen in investors’ choices of where to put a spare $10,000 is mirrored in a separate question asking investors how they feel about investing their own money in the market. Nearly half describe themselves as extremely or somewhat nervous about doing this; another 38% are a little nervous, while just 16% are not nervous at all.”

Therefore, the suggestion is that individuals are, on average, “bearish” about investing in the markets. This viewpoint has been the thrust of much commentary as of late that investors are so pessimistic, it’s bullish from a contrarian viewpoint. However, as I have shown above, there is a major difference between individuals that have no money to invest and those that do.

If we look at the American Association of Individual Investors allocation survey, we find a very different story unfolding. The chart below shows the allocation of AAII members as of July.

As you can see, equity allocations are at their highest level since prior to the financial crisis with cash at historically low levels. While investors may be “nervous” about investing, the data hardly suggests that investors are “sitting this one out.”

Furthermore, if we look at the “bullish sentiment” of Professional Investors, we find that sentiment has dropped from the near record levels set in July. However, sentiment remains very elevated and at levels normally associated with short to intermediate term corrections.

There are some interesting conclusions to be considered from this data.

1) For those that have money invested in the markets, they are as bullish as ever.

2) However, while they are fully allocated to the market, there is an inherent “distrust” for the markets that may lead to faster liquidations should trouble appear in the markets. Such knee-jerk reactions are likely not only to increase market volatility, but could accelerate eventual sell-offs.

3) For many, the financial markets are no longer the bastion of wealth building that it was once thought to be. After two major bear markets that destroyed massive chunks of retirement savings, many individuals no longer “trust” the markets for what paltry savings they have.

4) There is a huge difference between “investing” and “speculating.” There was a point in the history of the financial markets where individuals did “invest” for the long term. However, the opening of the “Wall Street Casino,” and the “financialization of everything,” changed investing into speculation. With holding times now devolved into less than a month, it is no wonder that many individuals have “lost the taste” for the “game” after being repeatedly “raped” since the turn of the century. The loss of “trust” with respect to Wall Street is something that will likely take decades to repair, if ever.

As has been seen near major market peaks in the past, sentiment has gotten well ahead of fundamentals. As John Hussman noted recently:

“Raghuram Rajan, the governor of the Reserve Bank of India and among the few economists who foresaw the last financial crisis, warned last week that ‘some of our macroeconomists are not recognizing the overall build-up of risks.

We are taking a greater chance of having another crash at a time when the world is less capable of bearing the cost. Investors say ‘we will stay with the trade because central banks are willing to provide easy money, and I can see that easy money continuing into the foreseeable future.’

It’s the same old story. They add ‘I will get out before everyone else gets out.’ They put the trades on even though they know what will happen as everyone attempts to exit positions at the same time.

All that’s required is for investors to begin to remember that risky securities actually involve risk. In that environment, selling begets selling.”

As I wrote previously, this current bull market could run well into next year. However, that statement does not mean that it will occur without incident. It also means that the next major market correction likely closer than most currently believe.