Market Perspective: Stocks Aren't So Spooky

Market Perspective: Stocks Aren't So Spooky

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by Liz Ann Sonders, Brad Sorensen, Jeffrey Kleintop, Charles Schwab & Company

Key Points

  • Along with new records being set by stocks, investor sentiment measures are showing widespread optimism; yet households’ exposure to equities is not at an extreme. We believe the bull market will continue, and suggest investors remain at their target allocations, but worry a bit about complacency.
  • Third quarter earnings season has been solid so far and economic growth has picked up. But the pick of the next Fed chair could cause an uptick in volatility.
  • Globally earnings have been strong as well and are helping to support stocks, but geopolitical and trade issues could cause some consternation.

There’s nothing to fear but…

The ongoing uptrend in stocks has only recently seemed to capture the hearts and minds of investors. The recent lack of volatility and “Teflon” nature of the stock market has boosted investor optimism; but may have also bred complacency about ongoing risks. We expect more upticks in volatility.

Lack of fear causing fear?

Source: FactSet, Chicago Board Options Exchange. As of Oct. 24, 2017.

But stocks continue to surge

Source: FactSet, Standard & Poor's. As of Oct. 24, 2017. Past performance is no guarantee of future results.

As noted, most measures of investor sentiment have moved firmly into optimistic territory; with the Investors Intelligence survey showing a high in newsletter writer optimism not seen since 1987. But behavioral measures of sentiment don’t yet match that optimism: flows into domestic equity mutual funds and exchange-traded funds (ETFs) continue to be flat-to-negative on a cumulative basis. As we’ve been highlighting, it’s easy to argue that we are in the latter innings of the market cycle; even though past performance does not indicate future results that phase often ushers in strong performance.

Gains typically accelerate in the final innings of a bull market as investors become more confident and push more money into the equity pot. As John Templeton’s famous quote says, “Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria.” This bull market has fed off skepticism for much of its duration—only recently displaying optimism, but not yet euphoria. We believe the current bull market will ultimately be followed by a traditional bear market—at a point of either excess tightening by the Federal Reserve and/or the anticipation of an economic recession. Neither is in our sights; although there are enough risks that a pullback could occur with even a minor catalyst.

Who’s afraid of the big bad wolf?

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