The Most Hated Bull Market in History Continues...

Over the last ten years, and especially since 2013, the current secular bull market has been dubbed by many market pundits as 'the most hated bull market in history'. The proverbial 'Wall of Worry' for markets. So maybe we call this one the 'Great Wall of Worry'? Our positive fundamental thesis, which we have discussed at length in these missives the past many quarters, has been in place for the past five years and we continue see more positives than negatives at present. The S&P 500 index pushing to a new all-time closing high again this week is another positive sign that the trend continues to be up.

However, what is very interesting is that clearly many have a different viewpoint, with Barron Magazine's Big Money poll over this past weekend showing that just 27% of money managers surveyed were bullish on the prospects of the market over the coming 12 months. What is incredible about this is that is the lowest reading of this semi-annual survey in more than 20 years! This reading far surpassed the previously all-time pessimistic reading of October 2002 after two and a half years of market pain. It is indeed hard to fathom that this Survey is saying there is more pessimism right now with markets in a clear long-term uptrend and near all-time highs, than during the 2000-2002 Dot-Com Bust and the Global Financial Crisis of 2008-2009, often dubbed the Great Recession.

The chart and data below from Sundial Capital Research illustrate the 10 lowest Baron's Big Money poll bullish percentage readings over the last 20 years. Although there are some outliers with anything, this shows that human nature seems to stay pretty consistent, and forward returns look very good when this much negativity is already priced into the marketplace. The data shows that the median one-year forward return in these readings was 11.4%, and if you look solely at the three lowest readings (including now) the median one-year forward return was 13%. The two and three-year returns also look strong, especially if you remove 1999 and 2007, which are both periods that, through our lens, are significantly different than the characteristics of the market today.

Source: Sundial Capital Research, SentimenTrader.com, Canaccord Genuity

The defensive nature of investors has likely been driven by the potential negatives of a possible US President Impeachment, negative Brexit outcome, worsening in the US/China trade war, Hong Kong protests, and weak global manufacturing data. The recent significant decline in interest rates seems to have provided a stabilizing catalyst, and this may have wrong-footed many investors in their overly defensive positioning. It is understandable that there is pessimism out there, but the level to which this pessimism has surpassed even the depths of the Great Recession (according to the Baron's Survey) is a bit surprising to us. We view this level of pessimism as a contrarian positive, especially given that our Milestone Recession Risk Composite™ is only signaling a moderately low risk level of US recession over the next 6-12 months.

It isn't just the Barron's Big Money poll either that demonstrates the current pessimism. Another widely followed sentiment indicator from the American Association of American investors (AAII) is their weekly published bullish and bearish readings. When we look at the bull ratio, which is the percentage of bullish investors divided by the sum of the percentage of bullish and bearish investors excluding neutral traders, and take a broader approach by looking at the 20-week average of that ratio to remove wild weekly swings, investors have recently shown the second lowest level of optimism in a decade (after August 2012) since the 2008 Financial Crisis. Again, with all that has happened over the last decade and where markets are today, this also seems hard to believe.

Source: Sundial Research Capital, American Association of Individual Investors, Saut Strategy

Maybe this really is the most hated bull market in history. If so, these measures are certainly backing that up. From our perspective, the positive fundamental drivers are still in place, so we would view any pullback or consolidation as an opportunity to invest in this market. The recent inflection in global manufacturing off historically weak levels, and US earnings growth transitioning from negative to positive, could be another tailwind for markets. As we stated in our Third Quarter Wrap-up, the equity market is a leading indicator, so it doesn't matter as much whether things are good or bad at the present, it is whether or not things are getting better or worse.