Just over a year has passed since the most recent cyclical bear market bottom and it’s been 11 months since we positioned all of our portfolio models to own a maximum overweight to equities. This bullish stance paid off throughout the uncertainty of 2016. Despite the Brexit vote, U.S. election upset, and the second interest rate hike by the Federal Reserve, equities rallied sharply. Because emotional investing rarely works well, we rely on objective indicators to help warn us when risks increase.
Although it is true that both the domestic and global economy have shown recent strength in conjunction with accelerating corporate earnings – A few warning signs have may be emerging. Chief among them is a violation of one of our three rules of investing: Beware the Crowd at Extremes.
One of our favorite charts for gaging investor optimism is the Crowd Sentiment Poll, produced by Ned Davis Research (shown below in red). This survey is designed to illustrate short and medium-term changes in investor psychology. After hitting a low (investor pessimism) of 42.8 about one year ago, the indicator has moved higher to 72.6 (a euphoric level not seen for over two years).
When investors feel complacent there’s often risk for a pullback. This is one reason we have cut equity exposure across all models and increased our cash position to 8-10%, depending upon the investment objective of the portfolio. Note that this still leaves us overweight equities, but with some dry powder to take advantage of any pullback that should occur. We will continue to closely monitor this and other indicators for that opportunity; or for additional reasons to be cautious and further cut equity exposure.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The S&P 500 is an unmanaged index which cannot be invested into directly. Past performance is no guarantee of future results.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
