Is there a bull market in feeling bad?
As 2019 draws to a close, US investors have much to celebrate: a YTD gain of 27% for the S&P 500 Index (S&P 500), its best annual showing since 2013; an economy expanding for the 10th consecutive full calendar year; inflation well anchored, with the Consumer Price Index near 2%; and a robust labor market, with the US unemployment rate at 3.5%, a 50-year low. Yet, despite what strikes us as much more good news than bad news when it comes to the market and economy, it doesn’t seem too many of us are in a celebratory mood. Consider this one data point, investors have pulled $136 billion from US equity-focused mutual funds and ETFs so far this year, the biggest withdrawal on record. If the way a person allocates capital is the ultimate reflection of their feelings about the world, how do we square good news on the markets and the economy with investor behavior, and what might that dynamic mean for the markets going forward?
We concede that demographics and prudent financial planning are playing a role in investors’ tepid embrace of stocks – as we age, we are often more interested in income than capital appreciation and put an emphasis on certainty of return – but we suspect “muscle memory” from The Great Recession and our strained political and cultural discourse are more meaningful factors influencing investor behavior. Said differently, the 2008/2009 downturn was such a blow to investor psyche and assumptions many of us simply walked away from risk assets, while our current political and cultural dynamic is so troubling that many investors are likely missing or dismissing data points that reflect a very healthy US economy and support an optimistic outlook for US equities.
While we lament that any number of US investors have missed out on or not fully participated in our nation’s current – and longest-running – bull market, there is an upside to that dispiriting development. If investors have not fully embraced US equities as an asset class – and we believe they haven’t – it should mean we are far from a market top and that there is ample capital available to come into the market, capital that could drive our historically long-lived bull market much further for much longer.