With the coronavirus continuing to impact, UK investors may need to get used to the concept of: “It’s different this time.” Time will tell as to whether the effect of the pandemic is more than just transitory. The concern is that the investing environment has changed structurally and personal finances will suffer. At the very least, current investor sentiment remains cautious.
Recent surveys show that individual and institutional investors are overwhelmingly bearish. The Bank of America-Merrill Lynch Fund Managers’ Survey is a closely watched monthly gauge of market sentiment. The survey of 223 fund managers showed that just 25% of respondents viewed April’s market rally as the beginning of a new bull market. At the same time, 68% saw it as a bear market rally.
The data also showed only 10% expecting a V-shaped recovery from the Coronavirus recession. Instead, 75% projected a slower U- or W-shaped bounce.
Respondents are more bearish than bullish
Defensive positioning in cash dropped to 5.7% from 5.9% the previous reading but remains well above the 10-year average of 4.7%, as several investors wait for risk assets to stabilise.
Even famed billionaire investor Warren Buffett is taking a more cautious stance. Buffett is having his company, Berkshire Hathaway, exit some equity holdings, which is allowing cash to accumulate. This included offloading 84% of his Goldman Sachs holding, a stock he picked up during the global financial crisis.
Buffet is playing it safe
A sentiment indicator released by TD Ameritrade reinforces this cautious tone. The TD Ameritrade Investor Movement Index is a proprietary, behaviour-based index designed to indicate the sentiment of individual investors’ portfolios. It reflects how they are positioned in the market.
The index has been in existence since 2010, and in that entire history there have been only five months where the index was weaker than it is now. That period was October 2011 through to February 2012, a period that marked a major equity market low prior to a strong three-year rally for the S&P 500.
Although this index is close to record lows now, it has been weak for some time. Even at times when the S&P 500 was hitting record highs over the last year, the index still flagged poor investor sentiment. The stock market rally experienced in 2019 was a poor quality, low conviction one. So even though investors are as cautious as they have been in the last ten years by these metrics, a degree of conservatism has been around for a while, regardless of strength in the market.
The investment community behaving cautiously should not come as a surprise. We are now living through economic history. The record-breaking decline in March, record Federal Reserve stimulus, record unemployment, record debt and deficits, and every other record being broken, are symptoms of how the world has changed.
Much depends upon how the pandemic shapes the global future. Federal Reserve officials have said they are worried that coronavirus-related lockdowns could spur bankruptcies and longer-term unemployment, potentially even inflicting lasting damage on the US economy. Minutes from a recent Fed meeting stated: “Participants expressed concern that the possibility of secondary outbreaks of the virus may cause businesses for some time to be reluctant to engage in new projects, rehire workers or make new capital expenditures.”
Officials at the meeting also worried that foreign economies, particularly emerging markets, “could come under extreme pressure as a result of the pandemic and that this strain could spill over to and hamper US economic activity.”
As things stand, there is a long road ahead. Personal balance sheets are being challenged. The effect on financial health is likely to be enduring for many, impacting long after the Coronavirus has disappeared. Households withdrawing money from retirement accounts.
Households withdrawing money from retirement accounts
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