People hate stocks more than at any time in the past quarter century. That could mean it's a decent time to buy them.
Wall Street's optimism about the stock market is the lowest it has been since at least 1985, according to a research note on Wednesday by Bank of America's stock strategist Savita Subramanian. The bank measures market agita by tallying how much stock strategists are recommending their clients buy stocks.
In the Bank of America chart at the bottom of this post, you can plainly see that sentiment has absolutely plunged this year.
Stock-market strategists are almost always bullish on the stock market, in part because if nobody is buying stocks, then there's not much point in having stock-market strategists, is there? They'd have to go home and sit on their couches. But today, these same strategists are so spooked by the European debt crisis and the fiscal cliff and whatever else -- Obama, or something -- that they are recommending clients sell stocks, more than they did even during the financial crisis or the dot-com bubble bursting or after the 9/11 terrorist attacks.
Typically, you're going to get some pretty good bargains in stocks when you've got so little competition for them, Subramanian writes. She would be one of the dwindling breed of bullish strategists: "Given the contrarian nature of this indicator, we are encouraged by Wall Street's lack of optimism."
Speaking of contrarian indicators, on Tuesday Pimco founder Bill Gross, manager of the world's biggest bond mutual fund, declared, "The cult of equity is dying." He warned that carnival barkers promising you annual returns of 6 percent to 7 percent every year in stocks were lying to you, that you should get those people out of your lives immediately. This is the same Bill Gross that predicted interest rates would soar last year (spoiler: they didn't) and then put his money where his mouth was, taking a big hit to his fund's performance and his reputation in the process.
Gross's stock-market pronouncement, too, sparked immediate contrarian glee and derision among stock-market fans like Wharton finance professor Jeremy Siegel, who apparently knifed a perma-smile into face, Joker-style, years ago. To him, it is always time to buy stocks.
For once, he might be right. The fact that everybody hates stocks is indeed a healthy sign for stocks, reminiscent of the infamous BusinessWeek magazine cover in 1979 braying of "The Death Of Equities," not long before the start of a 16-year bull market.
If you prefer your investment decisions to be influenced by something a little more serious than a magazine cover or a few talking heads, you could do worse than this chart of corporate stock prices relative to the amount of profit that companies produce, posted on Tuesday by Berkeley economics professor Brad DeLong. It, too, is at its lowest level in history, a history going back more than a hundred years. Typically, that means higher prices, and better returns, are ahead. And with bonds paying next to nothing in yield, stocks look even more attractive.
"[I]t is hard to see how stocks can return less than 5%/year over the next decade," DeLong wrote. "And in an environment in which you have to pay the Treasury 0.6% per year to watch your real value over the next decade, that is a very attractive expected return."
Before we get too carried away, it is worth remembering that stocks kept falling for another three years after that BusinessWeek cover. If you're buying stocks today, you may be in for a rough ride. Strategists are often clueless, but they're not wrong to worry about Europe or the fiscal cliff. The global economy probably needs some more time to recover from the credit bubble and bust of the past couple of decades. Investors, meanwhile, are not wrong to be cautious about leaping into a stock market that has apparently been taken over by robots on PCP.
Henry Blodget of Business Insider, while excoriating Gross for some mistakes in his analysis, actually agrees with Gross's point that stocks are going to put up some lame numbers for a while. He says they'll do so because stocks are still expensive relative to their long-term average, corporate profits are still too close to record highs and dividends are still historically low.
All of that is true. And late summer is probably not a great time to buy stocks anyway. Better to wait until the usual September/October panic, when everybody will really, truly hate stocks forever, amen. But with interest rates at nearly nothing, if you want to do something with your money beside stick it in a mattress -- which, nothing wrong with that, I guess -- then mediocre stock returns start to look pretty good.Extreme Bearishness.egg on Aviary.