A Plea to the Gloomy Investor
The classic tune “Dear Prudence” has a fascinating backstory and insightful message. Written in 1968 during the Beatles’ famous retreat to the Maharishi’s ashram in India, the message is timeless. The song is about Prudence Farrow, Mia Farrow’s sister, and her experience with John Lennon and the Beatles at the ashram. Prudence spent so much time in her hut meditating in search of “god” that the others in the group became concerned about her mental health. The tune, written by Lennon, was to urge Prudence to emerge from the dark place and see the beautiful world again.
Dear Prudence
Open up your eyes Dear Prudence
See the sunny skies The wind is low, the birds will sing That you are part of everything Dear Prudence
Won't you open up your eyes?
It is ironic that the heaven Prudence was searching for in meditation closed her off to the beauty just outside her door. It is also ironic that the name of the character in the song is also the word for the practice she is being urged to take. The definition of prudence: “the ability to govern and discipline oneself by the use of reason.”
This message reminded us of the current state of the economy and stock market. Today, investors and consumers have rarely been more pessimistic. The question we ask: is it prudent to sell stocks and remain in your hut or is it time to come out and see the light?
. . .
Professional Investors are as gloomy as they have been in last several decades as evidenced by the chart below from Bank of America’s Survey of Fund Managers.
The sentiment of investors is lower today than during the Great Financial Crisis in 2008. The sentiment extends from Wall Street to Main Street. The consumer is just as gloomy as investors are as evidenced in the illustration below from McClellan Financial Publications:
The chart reveals the negative sentiment of consumers (green line) has raised to pessimism levels above all past recessions since 1990. This includes the COVID global shut down, the housing crisis of 2008, the dotcom bubble, September 11, and all the other difficult times in our recent history. While there are many serious challenges in the global economy, we do NOT believe the future will be as dire as many investors believe for the following reasons:
1) Americans have jobs
2) Inflation is close to peaking
3) Many stocks have corrected to attractive prices
The chart above also reveals the reason we are not as pessimistic as we were during other difficult periods. The red line tracks the US Unemployment Rate. Note, sentiment of the consumer usually follows the path of unemployment. In other words, when consumers have jobs/income, they are usually optimistic. If the job picture changes, then we will adjust our concern accordingly and join Prudence in the hut.
Then, we must ask: why are consumers so glum? We hypothesize the reason for the pessimism is the combination of higher prices (inflation) and political divides. While the later will not soon be solved, it is highly possible inflation has peaked and prices will begin to lower (or grow less). So, Americans have jobs and prices are starting to fall … how does that relate to stocks in the portfolio?
The title of our annual letter was Fasten Seatbelt Sign is On. The thesis: investors would experience turbulence (volatility in asset prices) as the stim-fueled economy cooled from its record pace. This forecast was accurate, and the stock market entered bear territory declining 25% from peak-to-low of the year. Further, the tech-heavy NASDAQ is down 30%.
The negative sentiment and selling of stocks already occurred in certain sectors/stocks and presents several opportunities for patient investors. The average decline for the S&P 500 during a recession is 35%. Many stocks have already been sold to valuations reflecting the recession fears.
We do believe the stock market can go lower from here. However, we do not believe it will be bad as many investors fear. Like in the song, perhaps investors should “greet the brand new day” and “open up [their] eyes” because you can shape a bright future if you take the time to look to the beautiful and positive things the world has placed right in front of you.
Disclosures
INFORMATION PRESENTED IS FOR EDUCATIONAL PURPOSES ONLY AND DOES NOT INTEND TO MAKE AN OFFER OR SOLICITATION FOR THE SALE OR PURCHASE OF ANY SPECIFIC SECURITIES, INVESTMENTS OR INVESTMENT STRATEGIES. BLOOMBERG IS THE SOURCE OF MARKET DATA. INVESTMENTS INVOLVE RISK AND ARE NOT GUARANTEED. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RETURNS. BE SURE TO FIRST CONSULT WITH A QUALIFIED FINANCIAL ADVISER AND/OR TAX PROFESSIONAL BEFORE IMPLEMENTING ANY STRATEGY DISCUSSED HEREIN.