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Investors turning ‘2008-bearish’: Is it time to sell that S&P 500 tracker or buy some more?

18 August 2015

The S&P 500 has performed strongly over six years and was the leading global equity market in 2014, but 2015 has been flat with bearishness ramping up.

By Daniel Lanyon,

Senior Reporter, FE Trustnet

Investors should beware a heightening bearishness towards US equities of the likes not seen since the 2008 financial crisis, according to JP Morgan Asset Management global market strategist Alex Dryden, who says this should actually be seen as a buying signal.

US stocks built on their strong 2013 gains last year to be the best performing developed equity market of 2014, while the IA North America peer group was the best equity sector, taken on average.

Its very strong performance last year meant the S&P 500 still has had the most robust recovery of any stock market since the nadir of the financial crisis in March 2009, despite a weaker performance this year.

According to FE Analytics, the S&P 500 is up nearly 200 per cent in sterling terms since 2009 while the FTSE All Share, Topix and MSCI Europe ex UK indices have all returned less. This year, while the US index has returned less than the others, it is still just in positive territory.

Performance of indices since March 2009


Source: FE Analytics


In 2015 US equities have risen 2.99 per cent in sterling terms, about the same in US dollars, with investors favouring other areas such as Europe and Japan.


Performance of indices in 2015


Source: FE Analytics


Dryden says while the past three months have been generally bearish for equity markets, investors are particularly going off their US exposure to an extent reminiscent of 2008.

This negative sentiment is highlighted in the chart below, which shows that the weekly bullish sentiment survey conducted by the American Association of Individual Investors has reached multi-year lows last seen when markets plummeted in the financial crisis.

“Fears over Greece, China and the US Federal Reserve rate rise has resulted in there being more bears in the market than you’ll find at that oft-sung picnic in the woods,” he said.

Investors should not be worried by this trend, Dryden adds, because historically when this has occurred it has usually been the precursor to huge gains in the stock market.

“If history is any guide, the collapse in sentiment is a strong contrarian indicator for US equities. Historically, when bullish sentiment has dropped below 30 per cent it has on led to 21.3 per cent average return from the S&P 500 in the subsequent 12 months,” he said.

“Past performance is not always a good guide of future performance. However, in the famous words of Warren Buffett, ‘be greedy when others are fearful and fearful when others are greedy’.”

While many investors have chosen to buy tracker/passive funds for exposure to US equities in recent years due to a large proportion of active funds underperforming the S&P 500, 2015 has been the best year for US active funds in the IA North America sector for some time.

More than one-third of the peer group’s members are ahead of the index this year, compared to 29.4 per cent in 2014. Over three, five and 10 years about a third of funds are ahead of the index.

However, counter to what many might expect, active funds have done better in strongly rising markets in the US than falling markets. In 2013, for example, 70 per cent beat the index while in 2008 only 15 per cent did.

Felix Wintle, manager of the £370m Neptune US Opportunities fund, believes the next 10 years will be very different to the last for active management in US investing.


“The market return profile has changed and we are now moving into a different paradigm in the US. Tracking the market has delivered some very attractive returns in recent years, but I believe stock picking will be absolutely crucial in the next stage of the cycle,” he said.

“All boats have been lifted by supportive central bank policy, but finding quality companies trading at attractive valuation, in my opinion, will be the key to success over the next phase of the cycle. With interest rates set to rise and QE a thing of the past, investors will have to be far more selective in order to generate compelling returns from here on in.”

Russ Koesterich, BlackRock’s global chief investment strategist, believes that US stocks are likely to be set for higher volatility following a recent weak period for global stocks that have seen markets fall over the past few months, exacerbated in a sell-off last week.

“The trigger for the sell-off was China’s surprise devaluation of its currency, which left investors attempting to digest the implications,” Koesterich said.

“We don’t believe the move has the dire repercussions some have suggested, but it does fit within the broader narrative of a slowing global economy, with less support from emerging markets. One consequence of that scenario? Market volatility is likely to continue to rise.”

 

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.