About This Content - The views expressed here regarding market and economic trends are those of Investment Professionals, and are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading intent on behalf of Pioneer. There is no guarantee that these trends will continue.
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I’m feeling bullish on the markets. There, I said it. Despite the fact that (according to a recent Barron’s poll) 21% of financial advisors are not and, despite the fact that my formative years – with my bell-bottom pants and hankering for disco – were shaped by the depths of the 1970s bear market.
It stands to reason that people vote not in anticipation of their actions (i.e. selling stocks or not buying stocks), but rather to justify the actions they’ve already taken. Fund flows, as measured by the Investment Company Institute (ICI), continue to show massive net inflows into fixed income but massive net outflows from equities. This negative sentiment around equities is echoed by the asset allocation of large institutional plans (pensions, foundations, etc.), where there has been a steady decline of equity exposure in favor of non-traditional asset classes. And, the uncertainty around the Euro zone and the political bottleneck fronting the upcoming Presidential elections seem to have already been priced into most people’s market outlooks.
How can I be bullish surrounded by all this unsettling news? The markets are a discounting mechanism and their ebbs and flows are determined by what people are projecting forward. Uncertainty and volatility create waves that exaggerate negative sentiment. Given that, I think equities are under-owned by those who need them most. The general public is scared; they are barraged by the rapid-fire media reports of what has already happened (earnings reports and political fodder) and they are less focused on what the future potentially holds. I suspect that market players will have more conviction to project their faith into the future as the Euro zone quiets, as it inevitably will, and when the U.S. elections are over just a few months from now.
The markets are disquieted by uncertainty. An old saw says that you cannot play chess against a madman because you cannot anticipate any of his moves logically. So it goes (one of Kurt Vonnegut’s favorite phrases from Slaugterhouse Five) with the financial markets. Market participants, businesses and individuals are perplexed by the uncertainty and therefore cannot plan rationally. Many have forestalled purchases, hirings and tax planning because they don’t know what the future holds. In fact, some Fortune 500 companies have billions in cash off-shore hoping for tax relief to repatriate these funds. After the November elections, no matter who is elected, the ‘madman’ will have left the chess board and we’ll have a better idea of how to prepare our next moves.
I believe, 6 to 12 months from now, markets will improve and well look back at todays prices as bargains. If you recall, over 20 years ago Exxon was coming off its worst disaster in corporate history with the Exxon-Valdez accident. Market naysayers were predicting the worst, even bankruptcy. Yet, despite the concerns about the company and the markets upcoming headwinds, its stock climbed from the 20s at the turn of this century to the mid 80′s today – a fourfold increase! Dividends also increased over time. Anyone who had the foresight to purchase Exxon then, would currently have a yield on their original purchase of around 10–15%. Of course, past performance is no guarantee of future returns, but I’m going on record…I’m bullish (with time)!