What a difference a few weeks can make.
Earlier in the fall, most U.S. investors were down in the dumps. And can you blame them?
Stories of broken supply chains, soaring energy prices and the threat of 1970s-era inflation dominated the headlines.
On September 20, the CNN Fear & Greed Index – my favorite gauge of market sentiment – was registering at a lowly 21, firmly within “extreme fear” territory. That’s the kind of number you typically see after a sharp market sell-off.
Fast-forward to today, and the Fear & Greed Index has rocketed to an astonishing 86. A score of 75 or higher counts as “extreme greed.” It means many investors are partying like it’s 1999.
The recent rebound unfolded like a play I have sat through too many times to count… And the hero of this play is the ever manic-depressive Mr. Market. The plot revolves around his never-ending mood swings.
Mr. Market’s Eternal Cycle of Depression and Euphoria
In September, we found Mr. Market lying on a couch, his spirit crushed by the onslaught of negative news. U.S. stock markets endured a rough patch when they fell by nearly 5%.
A few weeks later, Mr. Market had conquered his depression. He was sprite, chipper and optimistic. By the end of October, the S&P 500 had rebounded 6.9%.
By November 5, the big three U.S. stock indexes – the S&P 500, the Dow Jones and the Nasdaq – had closed at or near record highs. The small cap indexes broke out to new highs as well.
Even long-lagging international stocks joined the party. The European STOXX 600 and even the benchmark index in France – yes, France has a stock market – hit record highs. The last time we saw this in France was at the height of the dot-com boom 21 years ago.
Today, Mr. Market rambles on incoherently about a “new era” for stocks.
Predictably, investors who were willing to buy when Mr. Market was down in the dumps have made a mint.
But it’s not too late for those who didn’t. Here’s why I think Mr. Market’s optimistic mood will last through the end of the year…
How Long Will Mr. Market’s Excitement Stick Around?
When investors get as euphoric as they are today, I usually pull in my investment horns. But here are three reasons I am remaining bullish, at least for now…
First, the latest earnings season on Wall Street has been impressive. Analysts expect S&P 500 companies to grow profits by about 35% in the third quarter.
Of the 445 companies in the S&P 500 that have reported third quarter earnings, 80.7% have beaten analyst estimates.
Second, the global financial markets have momentum in their favor.
Professional investors love to pooh-pooh the idea of momentum as fuzzy, nondescript and amateurish. Yet plenty of academic research confirms that a disciplined momentum investing strategy works surprisingly well.
According to Bespoke Investment Group, in past years when the S&P 500 has been up more than 20% in the first 10 months, the market has continued to rise every time. Market momentum is real. And it favors this market.
Finally, I’ve written before that the start of November marks the best time of the year to be in the market.
Studies confirm that investors across the globe make most of their money in the six months between November and April. And they have done so since 1693.
And it turns out you can drill down that number even further. November also marks the start of the best three-month stretch for the stock market.
According to Barron’s, the market boasts an average return of 3.4% from November to January.
What Happens Next?
Don’t mistake my short-term bullishness for “this time it’s different” naiveté. All parties come to an end.
Given its current exuberance, I expect the market to pull back a bit over the short term before it resumes its upward trajectory to close the year on a high.
My bigger concern is the outlook for 2022.
Depressed 2020 financials have flattered Wall Street’s third quarter results by comparison. A year from now, earnings may be growing at a more pedestrian 10% or so.
And remember: Financial markets are forward-looking. So it may not be long into 2022 before the market runs out of steam.
The bottom line? No one can predict the future with 100% certainty.
But based on a combination of earnings surprises… market momentum… and a strong track record of historical seasonality… I expect the U.S. market to continue to rally until the end of the year.
But I will be far more cautious in the months that follow.