FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
January 21, 2020

IN THIS ISSUE:

1. Investors Expect A 2020 Recession, But Still Bullish On Stocks

2. American Investors Are Really Optimistic on 2020 Returns

3. Contrary Opinion Theory: Using Sentiment To Predict Markets

4. Getting Prepared For the Coming Bear Market in Stocks

Poll: Investors Expect A 2020 Recession, Yet Still Bullish On Stocks

Say what? How can you be bullish on US stocks if you believe a recession is coming this year? But that’s exactly what Americans said in a late December survey by FORTUNE magazine. I can only guess most investors surveyed believe that if stocks went up nearly 30% last year, they can increase again this year – even if there’s a recession in the second half of the year.

That kind of thinking concerns me, as I will explain below. In short, it scares me when less than 5% think there’s a chance the stock markets could go down this year, even if a recession unfolds. The latest FORTUNE survey asked several detailed questions to a large number of investors, and I think you’ll find some of the responses interesting – although some may concern you, as they did me. Let’s start with the big numbers.

1. 58% of Investors Surveyed Expect A Recession This Year – This number surprised me in some ways, but on the other hand, the mainstream media is so negative I can understand why nearly six in 10 investors believe a recession will unfold this year. However, given that dire outlook, you would expect a large majority of investors would be bearish on the stock markets. Yet that is simply not true, according to the survey!

2. 76% of Investors Believe the US Stock Markets Will Rise This Year – I am astonished that over three-quarters of investors believe stocks will rise this year, despite high expectations of a recession. And get this: almost 20% of investors surveyed believe the US stock market will rise by 10% or more this year. And here’s the kicker: only 5% believe stocks will decline this year!

3. 51% of Investors Plan to Increase Their Equity Holdings This Year – Wow! This figure pertains only to non-retired investors; it was not asked to those already in retirement. Only 25% of investors surveyed said they planned to reduce their stock market exposure this year.

The FORTUNE editors who worked on the latest survey summed it up as follows:

“Investors are sending a contradictory message. They're optimistic about financial markets in 2020, but think the economy is likely to enter a recession. Among investors, 58% say a recession is likely in 2020, while only 5% expect a decline in the stock market. But history tells us it's unlikely stocks would move upward if the economy contracts.

And investors plan to act on that optimism. The majority of investors are planning to buy more stocks and boost their retirement savings in 2020. In fact, those planning to increase their stock holdings outnumber those who plan to shrink them by 2-to-1 [as shown in the chart below].”

Now let’s look at some interesting charts FORTUNE provided.

And American investors expect the biggest stock gains to come from domestic equities: 78% think the US stock market will outperform international stocks in 2020. It is unclear to me why over three-quarters of American investors believe US stocks will outperform all others in 2020, but apparently they do.

American Investors Are Really Optimistic on 2020 Returns

Here’s another stunner from the latest FORTUNE survey: Only 4% of investors expect their personal investment returns to decline in 2020. That is an incredibly low number given that more than half of investors say a recession is likely this year. Take a look below.

Remember, during the last two US recessions the S&P 500 dropped 13% in 2001 and a whopping 38.5% in 2008. A lot of investors are very likely headed for a rude awakening if they're right about a recession this year.

Notice above that over half, 52%, believe equity returns this year will be at least 5-10% or higher this year. Equally startling is the fact that only 2% of investors surveyed believe the market could drop 5-10% or more.

The good news from this survey is that a lot of investors (51%) plan to add to their equity holdings this year, which is one reason stocks have soared to new record highs already in the New Year. The bad news is that only 5% or less believe the stock market will decline this year, meaning 95% are bullish.

History shows that markets rarely perform as expected when investor sentiment is this lopsided! And that gets us to a brief discussion of “Contrary Opinion Theory.”

Contrary Opinion Theory: Using Sentiment To Predict Markets

Put simply, contrary opinion is the opposite opinion of the sentiment held by the majority. If 80% of investors or traders are bullish, then a bearish view would be a contrary opinion. If 80% of investors or traders are bearish, then a bullish view would be a contrary opinion. Contrary opinion can often be helpful in spotting key reversals in major trends.

Studies have shown for years (Dalbar for example) that investors who buy and sell based on their emotions routinely under-perform the market by a substantial amount and/or lose money. I have written at length about these studies for over 30 years.

Quite simply, the markets rarely perform as the crowd expects, especially when sentiment is as one-sided as it is today. Put a different way, “When everyone thinks alike, everyone is likely to be wrong,” as stated by Humphrey B. Neill in his seminal book, The Art of Contrary Thinking.

Yet there is one important aspect of contrary opinion theory we all must keep in mind: markets can continue to trend in the same direction even when contrary opinion suggests otherwise. There’s an old saying on this: “Markets can remain irrational longer than you can remain solvent” – if you are betting against it.

I believe this is the case with the current record-long bull market in stocks. With 51% of investors planning to add to their equity holdings this year, stocks could well continue to rally for weeks or months to come. However, when that wave of expected new buying plays out, we could see a dramatic reversal in the stock markets. Most likely, very few will see it coming!

Take the severe bear market of late 2007- early 2009 for example. If you recall, very few forecasters warned of a meltdown in the mortgage market. “It will be contained,” they told us. Even the globally respected Bank Credit Analyst believed this.

Getting Prepared For the Coming Bear Market in Stocks

I have no idea when the current bull market in stocks will end. No one does. But I think we can all agree that this bull is definitely getting long in the tooth. We should also be able to agree that with contrary opinion as extremely lopsided as it is today, the end is probably coming sooner rather than later.

Therefore, it is my strong recommendation that sophisticated investors use the period we’re in now, as this new stock buying occurs, to restructure your equity portfolios to include successful strategies that have the potential to make money  whether stocks move higher or lower – and to include time-tested strategies that don’t invest in stocks at all.

Investors who did nothing ahead of the late 2007- early 2009 bear market and rode it out saw losses which exceeded 50% in the S&P 500 Index. Unfortunately, many investors bailed out near the end of that historic collapse – they just couldn’t take it anymore. Sadly, many of those same investors never got back in, and they missed the greatest bull market in US history – which saw the S&P 500 rise over 400%.

Obviously, I don’t want to see that happen to any of my readers! At Halbert Wealth Management, we offer numerous successful strategies with a track record of making money in up or down markets, and others which do not invest in stocks at all. We can help you. As always, past performance is no guarantee of future results.

I understand that many of you prefer to deal with a financial advisor in your local area – many investors do. But here’s the question: Does your local advisor have access to the money managers and the hybrid strategies that we do? In most cases, the answer is a resounding NO.

I’ve made a career out of finding successful money managers that offer alternative strategies and manage your money for you. Since we all know this unprecedented bull market is going to come to an end – and the end won’t be pretty – I challenge you to consider some of the tactical strategies we offer at HWM while there is still time. Call us at 800-348-3601.

What have you got to lose? Potentially a bunch, if you don’t!

Best regards,

Gary D. Halbert

SPECIAL ARTICLES

Survey: Ultra-Wealthy Expect a Recession in 2020

Explanation of Contrary Opinion Theory

Gary's Between the Lines Blog: Gallup: Top Concerns of US Adults In This Election Year

 

Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc., a Registered Investment Adviser under the Investment Advisers Act of 1940. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of the named author and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific advice. Readers are urged to check with their financial counselors before making any decisions. This does not constitute an offer of sale of any securities. Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have their own money in markets or programs mentioned herein. Past results are not necessarily indicative of future results. All investments have a risk of loss. Be sure to read all offering materials and disclosures before making a decision to invest. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.