Professional Money Managers Starting to Waiver

Money managers

The stock market hasn’t shown any real signs of slowing down, but in a survey of money managers, their confidence in the current market is getting a little rattled lately.

We might think that this year’s rally, which wiped out the losses that the market suffered in the latter part of 2018, might have money managers more optimistic. Compared to last fall at least, more of them are now feeling bearish.

This doesn’t necessarily mean that much, but this is some of the things that investors pay attention to, and anything that influences investors’ beliefs and sentiments affects the stock market. Real and imagined fears stand right along one another when they lead to a pullback, as it’s the selling that counts, not so much what inspired it.

It’s not that we’re seeing a dramatic move to the bear side by these people, like we would see if we were actually in a bear market, but we have seen the percentage of professional money managers who describe themselves as bullish over the next 12 months drop from 56% last fall to 49% today. This is the first time that this number has dropped below 50% since the fall of 2016.

For what it’s worth, we did see the stock market rise by 20% from the fall of 2016 to the fall of 2017, so the majority was wrong then, and 20% in a year is a pretty bullish number. The same thing could happen over the next 12 months, and we’ve already seen 20% so far this year in a climate that could be described as somewhat undecided, so it doesn’t take people feeling particularly bullish to see a rise of this amount.

There are three responses to this question, and the neutral side has remained at 35%. This leaves 16% of respondents voting bearish, and while this is still up from the 9% that responded this way last fall, we are still left with a pretty positive sentiment overall, 49% to 16% to be exact. It’s only when the bears pull ahead that we need to be too concerned.

We don’t generally need to look to the opinions of these people to get insight on when the major trend will reverse enough to start calling this a bear market instead of a bull one, but for those who put stock in this, we at least need to be looking at the overall consensus here, and it’s still on the upward side, quite clearly in fact.

Stocks Felt to Be Fairly Valued Overall, And It’s Overvalued That We Worry About

When we move on to the question of what percentage of money managers feel that stock prices are overvalued, undervalued, or fairly valued, 69% believe that they are in the category of fairly valued, with only 23% thinking they are overvalued, and 4% going with undervalued. Whatever “value” is supposed to mean here, most of them do not think they are overvalued, which is a clear positive if we are putting weight on these opinions.

As it turns out, a lot of things affect stock prices that have nothing to do with present value, which is what we usually use in these attempts at valuation. A stock’s real value is where it may be in the future, and often far into the future, and this is what investors are really valuing when they pay more or less. Potential value may be better but that’s not how these people think of these things, but in any case, they do not feel that stocks are priced too high right now relative to their results, and this therefore does communicate some meaning.

Ingrid Hendershot of Hendershot Investments does shed some light on this question from the other side of the table though, remarking that “Mr. Market has had quite a run in the last 3 months, so we wouldn’t be surprised to see him take a bit of a breather here.”

Markets going up normally make it more likely that this will continue, provided that the move hasn’t been too abrupt. The rise this year has been nice and steady though and not the sort that would likely reverse under its own weight, although external factors could certainly do it.

Without Real Bears on The Horizon, The Skies Remain Fairly Clear

These external factors are never really known, but we then look to the horizon and see what potential may be out there and how likely it would be to happen. There are always some potential negatives but there’s really not much that should worry us, at the present time anyway, so the fact that we’ve gone up nicely doesn’t really mean that we may just give it up from becoming tired.

The usual concern here is that prices may be getting a little ahead of earnings growth, and while that does have some validity since people trade on these things, often we don’t, and this is not out of line to an extent that it should be a real concern.

We often look well beyond recent results when we invest, where the present matters but the future matters much more, and a big part of the upward trends that are created have actually nothing to do with anything other than people investing because they want to. Almost all favor the long side, and this has absolutely nothing to do with either present or future value, other than an assumed high enough future value to put money on it. The timing of a lot of investments doesn’t have to do with the market, but one’s pay cycle.

This can be disturbed of course, but it takes real changes in sentiment to do so, of a magnitude that dampens enthusiasm enough to produce a reversal. The bias is clearly to the long side though, and it takes quite a bit to overcome this.

Perhaps the most interesting part of this survey is how less bullish clients are than the money managers. Only 14% of them describe themselves as being bullish on U.S. stocks, with 19% bearing bearish and 67% neutral. The bears outnumber the bulls here, but given the trend we’ve seen with clients pulling money out of the market, leading to a net outflow, this should not surprise us.

This net outflow is believed to be reversing though lately, perhaps because this sentiment is changing, and the market going up does tend to shape these beliefs. The pullback last year shaped this quite a bit on the negative side, and clients are generally slower to change their sentiment, but this may already be underway.

We can actually have a net outflow from investors and still see stocks move up, but this just isn’t sustainable long-term. In order for the bull market to persist, this needs to change, but it seems to be already.

Of the issues that money managers are worried about impacting the stock market in the near future, 28% cited the economic slowdown, 21% were concerned about earnings disappointments, 13% were afraid the Fed might mess things up, 11% believe trade friction is the biggest threat, with 27% citing other reasons.

The nice thing about these results is that they aren’t skewed toward one single factor, and there were many different ones given, so that speaks to the fact that these concerns aren’t particularly pressing. When bigger ones come, we see a lot more distribution within the actual big reason.

83% of money managers surveyed stated that they are net buyers of stocks, with only 17% being a net seller. Regardless of how less bullish they may feel, their actions speak louder than these words and the actions are telling us they are still weighted on the buy side.

83% of respondents do not think that the Federal Reserve should raise interest rates, and 88% feel that they should not be lowered. This section came out strongly in favor of the Fed just standing by here and that’s what it makes the most sense to do when we understand what the Fed is after here, smaller but stable growth, which is exactly what we have already.

The consensus for GDP growth and inflation comes in right around what is predicted, which also makes sense. There are always unknowns involved though, but the feeling is that these unknowns shouldn’t affect these numbers very much.

Overall, this survey was plenty positive on the bullish side, even though some may want to point to the sentiment deteriorating somewhat lately. These surveys aren’t all that persuasive, but when you at least have them on your side overall, that can’t be a bad thing at least.

Andrew Liu

Editor, MarketReview.com

Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.

Contact Andrew: andrew@marketreview.com

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