43% May Be About to Miss Out

Written by Adam English
Posted May 12, 2022

It should be pretty clear that a whole lot of investors want out of the market.

Who can blame them? The NASDAQ is getting slaughtered, the Dow and S&P 500 are down about 12% and 15%, respectively, for the year. Meanwhile a broader view of U.S. stocks using the Russell 2000 shows a drop over 20%.

It's brutal out there, and with money flowing out over the last five months, it is easy to understand why 43% of investors say they're too nervous to invest right now, according to Allianz Life's Quarterly Market Perceptions study.

But what if now is exactly when they should be diving in?

Investing always requires a stomach for disappointing yourself. You forget the good times and dwell on the bad.

Allianz Life's data certainly backs that up:

  • 65% said given recent market volatility, they wish they had more of their retirement savings protected from market loss
  • 59% said they are looking to add more protection to their portfolio after the recent market correction
  • 66% said they wish they could have locked in their gains during recent market highs

A whole bunch of people are dragging themselves through the “could've, should've” trap.

Alexander Graham Bell once said, “When one door closes, another opens.”

Except that is not all he said. He continued, “But we often look so long and so regretfully upon the closed door that we do not see the one which has opened for us.”

It changes the nature of that tired axiom quite a bit, and plays into another recently released report.

Inflation data just dropped again, showing an 8.3% rise year-over-year for April. It split the difference between March's 8.5% and the projected 8.1% from economists.

It also hints at a bit of a pullback, or at least a plateau. Granted it is one near 40-year highs, but it could have major significance for investors.

According to a new report from Jim Paulsen of The Leuthold Group, stocks tend to perform really well right after inflation rate peaks.

His analysis shows that at lower inflation rates — between 2% and 4% — this effect is muted. Above that, the effect becomes more and more pronounced.

Above 8%, when a peak is hit, stocks outperform historical trends for the next year.

All of this ties into investor sentiment — think of that 43% mentioned above — more than just about anything else.

Most investors simply don't, won't, or functionally can't use forward indicators particularly well. Instead they look at the headline market numbers that are easy to find — the value of the indices and of their portfolios.

So while institutional investors run laps around them, they see their accounts declining, and headlines about what the Dow did today with some inevitably wrong, poorly explained reason why.

“Inflation fears rise/subside” on a seemingly day-to-day basis. It's not true and it is meaningless noise that only distracts.

Meanwhile meaningful information is hardly shared at all. Did you know car prices are declining? How about shipping issues being resolved and shipping costs sinking? That wage growth is moderating and labor participation rates are rising? That many critical base commodities are seeing price drops and improving inventory, which will moderate producer costs going forward?

Of course not — it is nowhere near as “newsworthy” as when these things were going haywire.

The April inflation information doesn't confirm a peak in the inflation rate. We'll have to wait for next month's numbers to get a better picture. But we should keep watching for it and not stay in a state of fear until we're well past a market bottom.

The stock markets will reward people when that peak occurs, and investors should be looking at how they'll position themselves for the next wave of stock gains right now.

Many will stay entrenched on the sidelines, too nervous to act, looking “so long and so regretfully upon the closed door that [they] do not see the one which has opened for [them].”

We need to make sure that isn't us.

Take care,

adam english sig

Adam English
Editor, Outsider Club

follow basic @AdamEnglishOC on Twitter

Adam's editorial talents and analysis drew the attention of senior editors at Outsider Club, which he joined in mid-2012. While he has acquired years of hands-on experience in the editorial room by working side by side with ex-brokers, options floor traders, and financial advisors, he is acutely aware of the challenges faced by retail investors after starting at the ground floor in the financial publishing field. For more on Adam, check out his editor's page

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