The Hesitant Investor

May 4, 2015 12:00 am

Betsey A. Purinton, CFP®

Managing Partner & Co-CIO

This could be a year when it is difficult to make a lot or lose a lot of money. Arguments are in place against the markets accelerating: the bull market has gone on longer than average, valuations are high, the dollar’s rapid rise has eaten into profits, and the plunge in oil prices has been more of a curse than a blessing – at least until this point.  At the same time the bears are having a hard time justifying why the markets should crash. They are up against an economy that is gradually getting stronger, stubbornly low inflation, a housing market that is beginning to show signs of real life, and a jobs market that is gradually putting people back to work. In addition, there are just too many cautious bulls and not enough outsized enthusiasts for a bear market to tame.

This past week, stocks and bonds both pulled back. Historically, if stocks were having a bad day, bonds would often do better, as investors pursued the “risk off” trade. And bonds often underperformed when the outlook for earnings and the stock market improved. But this week the market sell-off was led by bonds, with interest rates jumping 20 basis points in part due to the Federal Reserve. The Fed revised its language to create an open calendar for the initial increase in interest rates, stoking fears that the Fed could hike rates sooner than anticipated. Stocks, on the other hand, pulled back on poor earnings reports from Twitter and LinkedIn as well as an extremely weak Q1 GDP number. The S&P ended up down a half a percent, retreating from an all-time high reached on April 24th, while the Barclays US Aggregate Bond Index fell slightly less than .7%. The higher beta small caps took a bigger hit declining 3% over the course of the week.  These numbers should not cause concern, yet investor sentiment appears hesitant.

Data shows that a lot of people may still not be comfortable with the markets, even after six years of a bull market following the financial crisis. Ned Davis Research sites a Gallup poll confirming that fewer and fewer Americans are invested in stocks, either directly or through funds: 54% today vs 64% in 2001. The rate has even fallen since 2009 when the percent of equity investors was 57%.

Where are all these savers going? It is hard to find an asset class that can bring outsized returns under current conditions. At some point this year bonds could lose their boring status – in the wrong direction; real estate is far from booming and even REITS, a darling of 2014, are falling out of favor; commodities are in a longer term secular bear market; and alternatives are often expensive or inaccessible to the average investor. We might speculate that money withdrawn from equities is going into cash, except that cash is a losing asset when inflation is taken into account. And Ned Davis points out that liquidity through money markets has been decreasing since 2009 while cash (represented by M2 money supply) has also been declining for the last five years. That means we have to look somewhere else to determine where former stock investors are parking their money.

JP Morgan Asset Management’s Guide to the Markets provides data that shows debt payments as a percent of disposable income declining, a sign that people continue to pay down mortgages, lines of credit, credit cards and other liabilities. Savings numbers are also up. And money could also be going into increased spending as stalled incomes struggle to keep up with the cost of living. We are never ones to object to paying down debt and always love savings, especially on an individual basis, but as a society spending is more valuable to an economy because it can lead to growth and further hiring.

We would not be surprised to see the markets stuck in a trading range for a good portion of the year. From a money manager’s perspective, we are not unhappy with sideways markets. What we get one week, we may have to give back in another. We call it “taking a breather,” a time that allows the data to catch up with the valuations. If stocks have gotten ahead of themselves, it is good to slow the momentum down a bit. This allows the markets to regroup, and if earnings growth is maintained, it can make way for the next rally without introducing bubbles.

At this point in time, many investors, including ourselves, are looking to corporate profits and revenues to drive the markets higher. The economy is in the middle of Q1 earnings season. Due to the decline in oil prices, the rise in the dollar, a tough winter and a prolonged west coast port strike, the numbers are expectedly disappointing for the quarter. However, factoring in easier credit conditions, small business confidence, along with overall rising demand for durable goods and consumer products, profits should show reasonably healthy growth for the second half of the year. This could potentially translate into GDP of between 2.5 and 3% and modest upside for the markets by year end.

For now the “waiting game” we described in last month’s report continues. We would recommend that those who feel hesitant about the markets to stay invested. Anticipating the next bear market seems premature. So too predicting the next big rally. But with the economy picking up and a recession unlikely, we venture that the patient investor will be rewarded.

For a more personalized perspective on this topic, read Managing Director and Portfolio Manager Derek Amey’s most recent blog post.

Betsey Purinton, CFP® is Managing Director and Chief Investment Officer at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail her at bpurinton@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Betsey’s opinions and comments expressed on this site are her own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.