The Bull Market’s 5th Anniversary
Thursday, March 6, 2014
Charles Rotblut, CFA
AAII Journal Editor

AAII Resources

Achieving the Right Allocation
Sheldon Jacobs on how to structure your portfolio.

Valuations, Inflation and Real Returns
Robert Shiller on asset returns and inflation.

AAII Discussion Boards
What mistakes did you make during the financial crisis?

Most Popular AAII Articles

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Sentiment Survey

This week’s AAII Sentiment Survey results:
  Bullish: 40.5%, up 0.8 points
  Neutral: 32.9%, down 6.3 points
  Bearish: 26.6%, up 5.5 points

Long-term averages:
  Bullish: 39.0%
  Neutral: 30.5%
  Bearish: 30.5%

Take the AAII Sentiment Survey »

This Monday, be sure to say “happy birthday, bull” as the current bull market will turn five years old. Since bottoming on March 9, 2009, the S&P 500 has gained nearly 200% on a total return basis. This is quite the reward for someone who braved the fear and pessimism that was occurring back then and bought a stock index fund, such the SPDR S&P 500 (SPY).

Also take time on Monday to reflect on your emotions, portfolio decisions and tolerance for risk during the last bear market. Yes, I realize it was a dark period you’d as soon forget, but this is a useful exercise. The level of pessimism and fear was very high: Bearishness in our weekly Sentiment Survey reached a record level of 70.3%. Banks were failing left and right, credit was extremely tight, and well-known financial firms were imploding. There was even speculation about General Electric (GE) going bankrupt.

What was your reaction to the negativity? Did you pull out of stocks and equity funds completely? Partially? Were you concerned the economy was about to fall into the abyss? Did you think further stock market losses were coming? Or did you open your wallet and start buying stocks?

If you were terrified, don’t feel alone. Many people were. A key problem with many economic theories is the assumption that humans are rational, profit-maximizing individuals. As behavioral science shows, we’re emotional, impulsive and overly focused on the short term. Our minds are programmed for survival, not Mr. Market’s ever-changing moods.

Now, fast-forward to today. What do you think of the current environment? Are stocks going to continue rising for another year, two years, three years? What about bonds? Are interest rates going to be somewhat range-bound until at least 2016, or will they experience a sharp rise sooner? Before you answer, consider what your forecast for stock prices was during the second half of 2008 and the first quarter of 2009. If you made the wrong prediction then, what makes you think you’ll make the right prediction now? And if you did make the right prediction then, how certain are you of your ability to consistently make accurate forecasts in the future? The odds of doing so aren’t in your favor.

Part of what makes it so difficult to forecast what is going to happen next right now is history’s lack of clear insight. Sam Stovall, the chief equity strategist for S&P Capital IQ, says 11 bull markets have occurred since World War II. These rallies have lasted between 1.1 years (May 1947 through June 1948) and 9.5 years (October 1990 through March 2000). Five bull markets celebrated their fifth birthday and three celebrated their sixth birthday. The price-earnings (P/E) ratios and bond yields existing at the end of each bull market were all over the place.

Robert Shiller’s cyclically-adjusted P/E (CAPE) ratio isn’t a straightforward decision maker either. Bears compare to the CAPE’s current reading of 25.16 to the 1901 peak of 25.24 and the 1966 peak of 24.1. This comparison, however, ignores the 1929 high of 32.6 and the (December) 1999 high of 44.2. In other words, though the CAPE is currently above its historical average and median levels of 16.5 and 15.9, respectively, it has gone much higher in the past. A high valuation never guarantees an imminent decline in prices; it only implies that the risks of owning an asset are elevated.

So what are you supposed to do with this information? Control what you can control and don’t worry about the rest. You can control your ability to ensure your allocations match your long-term goals and not your short-term expectations. You can’t control whether stock prices or interest rates will rise or fall in the future. Most importantly, consider that even if your short-term timing is terrible and you get into the stock market at a time like January 2000 or January 2007, you will likely still do better by staying invested no matter what the market does. I’ll show data supporting this statement in either the April or May AAII Journal.

More on

The Week Ahead

Computerized Investing editor Wayne Thorp will speak to our Houston chapter on Saturday, our Austin chapter on Monday and our Dallas Chapter on Wednesday. He gives a good presentation, so go see him if you can. Those of you who are not near those cities can check the AAII Local Chapters page for an upcoming meeting near you.

The only S&P 500 company confirmed to report earnings next week is Dollar General Corp. (DG), on Thursday. Carnival Corp. (CCL) is listed on earnings calendars as reporting next week, though the company’s website lists no upcoming events.

The economic calendar is fairly light too. February retail sales and January business inventories will be released on Thursday. Friday will feature the February Producer Price Index and the preliminary March University of Michigan Consumer Sentiment Survey.

Philadelphia Federal Reserve Bank President Charles Plosser and Chicago Federal Reserve Bank President Charles Evans will both speak on Monday.

The Treasury Department will auction $30 billion of three-year notes on Tuesday, $21 billion of 10-year notes on Wednesday and $13 billion of 30-year bonds on Thursday.

AAII Sentiment Survey

Optimism about the short-term direction of stock prices stayed slightly above its historical average for the fourth consecutive week in the latest AAII Sentiment Survey. Pessimism rebounded, but remains below its historical average.

Bullish sentiment, expectations that stock prices will rise over the next six months, increased 0.8 percentage points to 40.5%. The historical average is 39.0%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged, fell 6.3 percentage points to 32.9%. Even with the drop, this is the ninth consecutive week with a neutral sentiment reading above its historical average of 30.5%.

Bearish sentiment, expectations that stock prices will fall over the next six months, rebounded by 5.5 percentage points to 26.6%. The increase was not large enough to prevent pessimism from being below its historical average of 30.5% for the 22nd time in 26 weeks, however.

Only two other periods with pessimism staying below its historical average for similar lengths of time have existed over the past 10 years. The first was a 20-week span between August 19, 2004 and December 30, 2004 with 16 weeks of pessimism below 30.5%. The second was a 23-week span between September 16, 2010 and February 17, 2011 with 20 weeks of pessimism below 30.5%.

When looking at the current trends in individual investor sentiment, it is important to note the lack of high levels of optimism. Although pessimism has mostly stayed below average over the past six months, bullish sentiment among AAII members—in aggregate—has mostly been at levels we would not consider to be enthusiastic.

The events in Ukraine do not appear to have significantly impacted individual investors' short-term outlook for stock prices so far. A few members did say, in response to this week’s special question, that the crisis is causing them to be more cautious. Some AAII members are also fretting about elevated stock valuations, the pace of revenue growth and Washington politics. Many other AAII members are encouraged by the sustained upward momentum of stock prices, earnings growth, economic growth and the Federal Reserve’s tapering of bond purchases.

This week’s special question asked AAII members how comfortable they are with prevailing stock valuations. Slightly less than half (47%) of respondents described themselves as uncomfortable. The primary reasons given were current price-earnings ratios and the slow pace of economic expansion, particularly job growth. About 26% of respondents said they are comfortable with current valuations. These members pointed to economic growth and the ability to still find stocks trading at attractive valuations. About 9% of respondents said they thought the market was either fairly valued or that they are still comfortable with the market at the current level even though valuations are elevated.

Here is a sampling of the responses:

  • “I’m uncomfortable. Jobs are not increasing at this time.”
  • “Valuations are quite high and a bit stretched from historical norms.”
  • “With current and future economic conditions looking good, I believe we should have a good 2014.”
  • “Valuations are historically a bit high, but this does not make me uncomfortable—only cautious.”

» Take the AAII Sentiment Survey

AAII Asset Allocation Survey

February Asset Allocation Survey results:
Stocks/Stock Funds:
    66.9%, up 1.3 points
Bonds/Bond Funds:
    16.2%, down 0.8 points
    16.9%, down 0.5 points

Asset Allocation Survey details:
     35.0%, up 4.1 points
Stock Funds:
     31.9%, down 2.8 points
     3.9%, up 0.4 points
Bond Funds:
     12.3%, down 1.2 percentage points

Take the AAII Asset Allocation survey »

Individual investors’ allocation to equities stayed above 60% for the 11th consecutive month in February, according to the latest AAII Asset Allocation survey. This is the longest such streak since prior to the financial crisis. Fixed-income allocations declined last month, while cash holdings increased slightly.

Stock and stock fund allocations rebounded by 1.3 percentage points to 66.9%. February was not only the 11th consecutive month with equity allocations above their historical average of 60%, but also the 13th out of the past 14 months.

Bond and bond fund allocations declined 0.8 percentage points to 16.2%. Even with the decline, fixed-income allocations were above their historical average of 16% for the 55th time in the past 57 months.

Cash allocations decreased 0.5 percentage points to 16.9%. This made February the 27th consecutive month with cash allocations below their historical average of 24%.

The current streak of above-average equity allocations is the longest since a 12-month streak between August 2003 and July 2004.

February’s rebound in stock prices alleviated some of the short-term fears that a market top had been established in January. Even though the month ended with the S&P 500 at a record high, bullish sentiment remained below the levels recorded at the start of the year. Improving stock prices helped to boost the value of equity allocations while a relatively stable yield environment did not alter the value of fixed-income holdings much.

Last month’s special question asked AAII members what their allocation to emerging markets was, and if it had recently changed. The largest group, 38% of respondents, said they did not have any exposure to emerging markets. Approximately 27% of respondents said their emerging markets exposure was 5% or less, while 14% had between 6% and 10% of their portfolio allocated to emerging markets. The vast majority of respondents said their current allocation or lack of exposure to emerging markets has not significantly changed recently. Slightly more than 8% of respondents said they reduced their exposure in recent months, however, while 7% either have increased or intend to increase their exposure to emerging markets.

Here is a sampling of the responses:

  • “My only exposure is as part of diversified international funds.”
  • “I have nothing in emerging markets, but I am invested in companies that have an international presence.”
  • “I feel that the emerging markets are too risky for me right now, so I have backed out.”
  • “Presently I have no exposure, but I am considering venturing into emerging markets as they continue to melt down.”
  • “Zero and no change. I don’t invest overseas; the U.S. markets are enough of a mystery.”

» Take the AAII Asset Allocation Survey