Spring Cleaning

What’s been a tumultuous period in the equities markets (stocks) over the last 7-8 weeks certainly has left a sour taste in the mouths of investors, despite what has felt like, at times, positive traction since the jolting April 2nd - April 7th decline. Investor sentiment, as polled by the American Association of Individual Investors, has sat between 52% and 62% of those polled feeling bearish about the markets, meaning they feel that the forward trajectory over the next six months is negative.

We do like to caveat AAII sentiment numbers with the qualification that this weekly survey tends to be skewed a bit by hindsight bias. What has recently happened in the markets and economy tends to affect the sentiment measurements in this poll, so it’s important to consider that this information is certainly not a predictor, but can be used to gauge the “feeling” amongst investors. After all, investors are the ones driving stock price action: more buyers of stocks leads to increasing stock prices, and less buyers of stocks leads to decreasing stock prices. Supply and demand at it’s simplest.

There is no one single metric or tool that can be used to know what future price action looks like in the equities markets, hence why we are hesitant to attempt to predict what the market will look like in 3-6 months. But the AAII survey is one of them (found here) and can be helpful at understanding the feeling amongst investors over various periods, including the unique one that we are in now, where international affairs and changes in domestic and foreign policy (both by the US and by other governments globally) clearly affect how investors feel about investing in the markets.

Broadly, US indices are down year-to-date (YTD), as I highlighted in my last blog, and investor portfolios might possibly be down even more than the indices. The technology sector, a prevalent leader amongst the 11 primary sectors that stocks are categorized into, is down 19% for the year (using Vanguard’s tech sector ETF (VGT) as the proxy). Nvidia (NVDA), the second-largest holding inside of VGT, is down 28% YTD, despite it’s meteoric rise of 1267% over the last five years.

If you’re already invested in an area of the market that has been beat up pretty badly, navigating through that can be difficult. Initial thoughts might be to sell away from declining positions, be it to cash, or into other positions, though our experience has showed us that periods of volatility make it more difficult to make sound portfolio changes - especially when the environment changes so quickly (much like March 2020). Letting the market settle, much like letting the storm clouds pass, can be a prudent way to make better investment decisions. That is an approach that I would advise any of my clients to undertake at a time like this. Use this time to understand where market strength and market weakness is, looking deeper across various parts of the market (where you’ll see that gold as a commodity has had a great year thus far).

While the investor sentiment is bearish as a majority, that does not predetermine the way ahead in the markets. There’s almost always a place to make money, and this period of turmoil is simply an opportunity to grow one’s understanding before making changes in the portfolio.

Like spring cleaning. There’s some clutter and some things in the basement/attic that must go. Nobody wants to do it, but it’s gotta be done. Periods of decline happen regularly in the markets, and we are in one right now. Stay the course!