Systematic Relative Strength

It’s no secret that investors have had a fairly negative outlook toward the stock market lately. Their negative perception shows up both in flow of funds data and in our own advisor survey of investor sentiment.

One possible—and shocking—reason for the negative sentiment may be that the public thinks the stock market has been going down!

Investment News profiled recent research done by Franklin Templeton Funds. Here is the appropriate clip, which is just stunning to me:

One surprising finding shows that investors are likely so consumed by the negative economic news, including high unemployment and the weak housing market, that they haven’t even noticed the strength of the stock market.

For example, when 1,000 investors were asked whether they thought the S&P was up or down during each of the past three years, 66% thought it was down in 2009, 48% thought it was down in 2010, and 53% thought it was down last year.

In fact, the S&P gained 26.5% in 2009, 15.1% in 2010, and 2.1% last year.

That blows me away. I have never seen a clearer case of the distinction between perception and reality. This data shows clearly that many investors act on their perceptions—that the market has been declining for years—not the reality, which has been a choppy but steadily rising market.

The stock market is ahead again year-to-date and money is continuing to flow out of equity mutual funds. I understand that the market is scary sometimes and difficult always, but really? It amazes me that so many investors think the stock market has been dropping when it has actually been going up. Of course, perhaps investors’ aggregate investment decisions are more understandable when it becomes clear that only a minority of them are in touch with reality!

Advisors obviously have a lot of work to do with anxious clients. The stock market historically has been one of the best growth vehicles for investors, but it won’t do them any good if they choose to stay away. Some of the investor anxiety might be lessened if advisors stick with a systematic investment process using relative strength—and least that way, the client is assured that money will only be moved toward the strongest assets. If stocks really do have a long bear market, as is the current perception, clients may be somewhat shielded from it.

This entry was posted on Friday, September 21st, 2012 at 9:19 am and is filed under Investor Behavior, Markets, Sentiment, Thought Process. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.