It’s not easy being a contra. In general, one of the most reliable tricks in the book is this: when risky markets are buoyant, sell. If you are in the depths of desperation, buy.
This is always a subjective process. Right now, however, sentiment measurements are sending out so many conflicting signals that this strategy is dizzying. How can you do the opposite when it’s impossible to tell if investors are too happy or too sad?
Overall, if you ask them, they say they are sad. Bank of America’s ever-useful monthly survey of fund managers shows they are about as pessimistic about growth today as they were in March 2020, just before central banks rushed to bail out the Covid-infected financial system. That sounds bad. It’s bad. Good news for contrarian buyers of risky assets.
There are two problems with this: First, global stocks are already about 20 percent higher than in October. Twenty! Two-oh! Adding that now is bold. On the other hand, the mood has brightened significantly in recent weeks. All major sentiment indicators have improved over the past month, and shifts in asset allocation point to a greater appetite for risky bets, BofA says, although sentiment is still “nowhere near optimistic enough” to justify bearish bets.
So, for those who earn points, investors are simultaneously sad, but not sad enough, and happy, but not happy enough. I warned you it’s dizzy.
Research house TS Lombard’s Dario Perkins says this is a “confusing time for investors, especially contrarians.” Quite. To him, that’s because investors have been sold a blind frame for this year’s big trading themes, a recession narrative that just doesn’t make sense.
“Often such an analysis was rooted in superstition [or trauma] from 2008 and not hard macroeconomic data,” he says. Instead, he adds, we’re in a “wrong” cycle that just doesn’t fit into the usual patterns. Covid lockdowns, rapidly changing labor markets, massive swings in monetary policy and war in Europe mean, at the risk of using a dangerous phrase, this time is different.
“A tight labor market is certainly an argument for keeping interest rates higher for longer, but it’s not an argument for crushing the economy with endless rate hikes, especially in a fake business cycle full of surprises,” he says. “I bet this confusing economy will continue to frustrate everyone – bulls and bears alike.”
Right now, most of the frustration is in the bearish camp. For now, as BofA says, the “pain trade” in riskier assets — the trail for markets that would hurt investors the most — is higher. Relatively few are able to capitalize on a continuation of the already established trend, and doubters are in no hurry to give up.
“This rally is untrustworthy and people are very skeptical,” said Patrick Spencer, vice chairman of equities at Baird, the private investment firm. Spencer has been in the bullish camp since around October, making him one of last year’s contrarian winners. He says the current rally is “the most hated bull market of all time,” but there’s no point in fighting it.
Supply chains are functioning much more normally, inflation has gotten out of hand, the Fed is choosing lower interest rates instead of higher, and in this context, American companies are no longer burdened with an unusually strong dollar. The employment data may also be a bit choppy, but the direction of travel is clearly positive. Add to the mix: China is recovering from Covid lockdowns and Europe appears to have dodged a cold and wickedly expensive winter.
“Everybody’s worried about a recession, but we’ve been sitting here for 12 to 18 months talking about it all the time,” Spencer says. “We’ve seen layoffs, all the downsizing in tech. . . Companies have dealt with it. It’s in the market. Interest rates are going up but markets are not going down and that’s a very, very good sign.”
For him, the greater danger sits there, waiting for disaster to strike. “Everyone is waiting for the market to correct so they can get back in,” he says. “I don’t think they will get the chance.”
Jack Janasiewicz, senior portfolio strategist at Natixis Investment Managers Solutions, is another hard-line bull. “I get a lot of criticism for being a perpetual optimist,” he says. When he first found out that stock markets were pricing in what he calls a “normal recession” last August, he switched to a riskier portfolio, He says he “got a lot of hate mail, people telling me how stupid I was.”
“The big setback I get is people saying, ‘Wait a minute, the recession is coming.’ OK, but if you keep saying that, we’re up 20 percent from the lows.”
People would now switch to his way of thinking, says Janasiewicz, but many investors are “marked” by a brutal 2022 and sense a “career risk” if they make the wrong bet again. He has a decent contrarian indicator himself: “If more people say ‘You’re not an idiot,’ then maybe that’s settled.” – FT.com
