The next major bull market is probably the last thing most investors are thinking about at this point. Sentiment surveys, including our own, suggest that investors are suffering from what Hays Advisory has referred to as PBSS, Post-Bear Stress Syndrome. Every time the market starts to move down, investors panic and run for the exits due to their recent conditioning from 2008. Giant bull markets, like most conflagrations, require two things to start: 1) fuel, and 2) a match.
Source: www.taberconsulting.com
On the matter of item 2, we still seem to be a ways away. Investors just are not comfortable committing to the stock market right now. Their reluctance shows up in a variety of ways, from outsized purchases of low-yielding bonds to expressed concern about the economy and the place of the U.S. in the new world order. The recent sentiment extremes resulting from a 10% market correction are another symptom of this. Investors seem to be willing to trade a bounce, but no one is going to “fool” them into buying stocks for the long term again! I’m not sure what it will take for investor sentiment to become less negative. It could be a variety of things: better employment data, less consumer leverage, or maybe some time just needs to pass so the memory of 2008 isn’t so sharp. This process could take weeks, months, or years.
Fuel, on the other hand, is abundant. Although struggling consumers and corporations are in the process of rebuilding their balance sheets, many successful companies and consumers with positive cash flow are squirreling the money away. They are perhaps not comfortable investing it yet, but the cash is building up quickly and is going to create a tsunami when it breaks loose.
Consider, for example, a recent article from Morningstar on the commercial real estate market. They say:
We believe the large amount of capital that REITs, pension funds, and private investment funds have amassed for commercial real estate investment has, to date, overwhelmed the available supply of assets for purchase.
Believe me, there is plenty of distressed real estate available, but so much capital has piled up that there are not enough assets to go around!
Then there’s this from a recent hotline from Al Frank Asset Management (the bold is my emphasis):
…there is still $2.8 trillion parked in money market funds where the average yield is 4 basis points. The Los Angeles Times also reported this weekend that there was $5.1 trillion at the end of May sitting in basic savings accounts at banks and thrifts, not providing much of a return either. And we heard from the Federal Reserve last week that nonfinancial companies had $1.8 trillion in cash and other liquid assets at the end of March, a 26% increase over the year prior, the biggest annual change in a history for the measure that dates back to 1952. That cash represents 7% of all company assets, the highest tally since 1963.
Literally trillions of dollars are piling up in low-yielding assets. And fuel is building up at a pace never before seen-post-bear stress syndrome indeed!
So what’s the likely path of history? Will investors be content to keep assets at 4 basis points indefinitely? While I suppose anything is possible, it seems more likely that over time memories of the 2008 bear market will fade. Investors will realize that they need equity-like returns to meet their savings and investment goals. A trickle of money will start to flow from cash and low-yielding bonds into the stock market, which will nudge the market higher. As the market begins to move up, investors will become more confident and yet more money will flow into stocks. The next thing you know, we could have another mega-bull market on our hands, although most probably won’t be willing to believe it. Plentiful fuel and public disbelief is how bull markets start and then extend themselves.
I don’t know what it will take to bring the fuel and the match together, but I’ve seen enough hillside brush fires in Southern California to know that nature abhors a lot of unburned fuel. Sooner or later, someone is going to strike a match and we will have a market that will be on fire for a long, long time.
Source: www.fire.lacounty.gov
[...] Upon Further Review One of the effects of PBSS (Post-Bear Stress Syndrome) has been the flood of money into fixed income over the last couple of [...]
[...] talked about the tremendous build up of cash in the system before. It usually needs some kind of trigger event to pry it loose, and the trigger event is almost [...]