Much like the record bearishness of equity research analysts, the fact that investment newsletter editors are considerably more bearish than they have been in the last couple of years may be a sure sign that the market still has legs. Evidence, from the New York Times:
The Hulbert Financial Digest, which has been tracking the investment newsletter industry since 1980, has found that the stock market performs far better, on average, after periods when newsletters are very bearish than when they are quite bullish.
The theory is that market tops exist when the predominant sentiment amongst investors is bullish, due to the nature of investors to pass on current trends as “predictions.” Since the bears are circling, the top may be far off. Today, the average short term investor newsletter newsletter recommends equity exposure of just 30%, down from recommendations of 71% 8 months ago.
There have been fewer bear sightings in circles of economists, where the general outlook is upbeat. The few polar bears that are in the mix are adamant that the economy is due for a tumble, however. The Wall Street Journal highlights one of its most historically accurate economic forecasters (also one of the most historically inaccurate in off-years), James Smith of Parsec Financial Advisors. Smith contradicts the consensus inflation adjusted GDP growth estimate of 3% in Q2 of this year and between 2% - 3% for the remainder of the year, thinking that GDP growth will shrink to almost 0% before rebounding in Q4 to 5%.
Are the GDP growth predictions of economists in the ballpark when compared to actual GDP growth? The Wall Street Journal looks at economist consensus forecasts of annualized GDP growth and shows that economists were off most in the late bubble and after the crash (1998-2002). The chart also demonstrates that the consensus forecast is pretty much always between 2% - 4%, which makes sense, since a consensus estimate will temper the extreme optimists and pessimists. Basically economists are spitting out something close to the historical average GDP growth in aggregate, which isn’t necessarily a good predictor of anything, especially in the last 10 years.
The Crowd Is Restless, but Maybe That’s a Good Sign [New York Times]
In a Sea of Optimism, Why Some Forecasters Warn of Recession [Wall Street Journal]
Posted by Chris G., Jun 26, 2007 5:00PM
This post is so very excellent in so many ways.
Write a bull-market newsletter by pointing out that there has been an uptick in bears toward the end of - yep - a long bull run.
Here's another way to sum up your article - "We've been in a long bull run now, and it's clear we're going to continue the bull run because there are more bears now than there were last year. In fact, some of these bears are writing in what was formerly a bull-only gossip circle, so that MUST mean this bull market will continue."
You're right about one thing - tops are formed when everybody is bullish. How better to signify that than to write a post about a bull market whose only point is that there are more bears now than there were before, and that's why the bull market will continue?