Tell me what just happened, and I'll tell you what investors expect next...
Recency bias drives expectations. When times are good, everyone expects the good times to continue... And when times are bad, folks expect more trouble.
That's why contrarian investing works. When expectations hit massive lows, there's no one left to drive prices down further. So instead of getting "more of the same," you get a major reversal.
That's where we are right now, based on one indicator. This measure tells us that nearly half of investors expect stock prices to fall. That's one of the highest readings on record.
As contrarians, this should get our attention. Sure enough, history shows this is a good buying opportunity that could lead to double-digit gains...
It's smart to be contrarian. And right now, the contrarian bet is on higher stock prices.
We can see that by looking at data from the Conference Board. This business-minded think tank and industry group produces research, organizes events for its members, and surveys those members monthly.
The Conference Board's best-known metric is its Consumer Confidence Index. But it also asks members what they expect from the stock market...
Nearly Half of Folks Expect Stocks to Fall
Specifically, it asks if members expect stocks to rise or fall over the next 12 months. And in April, 48.5% of folks said they expect lower stock prices. Take a look...
Stocks have an upward bias. So most folks should (and do) expect higher prices most of the time... But now isn't one of those times.
Stocks have had a rough few months. And despite a healthy rebound, people expect the tough times to continue. According to this measurement, we're seeing the most negative sentiment since 2011.
This is a rare reading. And to see what it means, I looked at each unique instance of this measure rising above 40%. That has happened eight other times since the data began in 1987. And overall, these were darn good times to buy. Take a look...
U.S. stocks are a good long-term investment. But you can improve your returns if you buy at contrarian moments like today...
Similar setups led to 8.6% gains in three months, 11.7% gains in six months, and 10.7% gains over a year. In all cases, that's solid outperformance.
Now, the interesting thing is that the six-month returns are higher than the one-year returns. That's because we had one very bad signal in February 2008... before the worst of the financial crisis. In that case, stocks fell 45% over the next year.
If we remove that signal, the one-year return jumps to a much more impressive 22.3%. Of course, we can't just remove signals. But this nuance tells us that if we don't see a 2008-style crash, the outcome is likely great for stocks going forward.
In any case, we want to buy when everyone else assumes the worst. That's the key to contrarian investing. And right now, we have a rare and powerful contrarian signal. Don't miss it.
Good investing,
Brett Eversole
Further Reading
When markets fall, investors tend to flee to safe-haven assets like U.S. Treasurys, strengthening the dollar. But this time, this tried-and-true formula hasn't played out. Stocks and the dollar are crashing together. But history shows this unusual setup could be a bullish signal for both assets... Learn more here.
"Doomscrolling gives us all sorts of reasons to not invest," Pete Carmasino writes. While investors sit on the sidelines, scared out of the markets by headlines calling for chaos, Wall Street's "smart money" is taking advantage. They're not chasing the news – they're targeting strength beneath the surface... Read more here.
