ASX to rise, $A retakes US71¢, Wall St rallies on banks
Although some investors are betting on equities shedding more value, the end of the rout may be nearer than it appears, according to Jim Paulsen, chief investment strategist at The Leuthold Group.
In a post, Paulsen said one of the most striking aspects surrounding the post-pandemic bull market and the recent appearance of a bear market was that both have taken place without confidence ever meaningfully rising on either Main Street or Wall Street – at least compared to the past 62 years
“Conviction across both Main Street and Wall Street is currently lower than about 94 per cent of the time since 1960. The bear doesn’t have to ‘check’ any optimism because it is already gone,” Paulsen wrote.
“Historically, when confidence was this low, the bear was close to expiring, and the average year-ahead S&P 500 return was more than plus 20 per cent. Compared to historical norms, based on today’s extremely negative sentiment, the stock market finds itself in an area where, traditionally, bears die … and … bulls come out to play.”
Paulsen argued that the post-pandemic era stood alone as the most “pessimistic” bull market ever.
“Despite an economic recovery and a bull market, Main Street’s confidence has been below its 50th percentile ever since 2020. Likewise, since 2020, the VIX Volatility Index (investor fear) has been above its 50th percentile,” he said.
“There has been chronically elevated stock market volatility [investor fear] and persistent Main Street negativity in a manner never seen back to 1960. Indeed, since 2020, for the most part, consumer confidence has been below its 30th percentile, while the VIX Volatility Index has been above its 70th percentile. By these measures, it has been a unique period of chronic pessimism.”
Paulsen said bear markets died when sentiment turned overly pessimistic because “fears about the future” become so far-fetched.
“With confidence so depleted, can it really get much worse? For example, if one expects the end of the world, it’s difficult to surpass that degree of fear. Second, given today’s excessive pessimism versus historical norms, it seems much more likely to diminish than stay the same or worsen.”