Fearful?

Inflation spikes, war in Ukraine, wild political environment, trillions in government debt, bear markets in both stocks and bonds, mass shootings, divided media, and on and on – there is no shortage of “never in my lifetime have I seen” moments right now.

The chart below shows the University of Michigan’s US Index of Consumer Sentiment going back to the 1960s. This index measures consumers’ feelings about the economy and their subsequent plans to make purchases. The June 2022 figure (50.0) marks the lowest reading the survey has ever recorded. It’s clear that folks are concerned.

One of my favorite Warren Buffett quotes is, “Be fearful when others are greedy and greedy when others are fearful.” This quote goes back to the Chairman’s Letter Buffett wrote in February of 1987. Most quotes are taken out of context, but I think his actual text is better than the quote:

...we have no idea - and never have had - whether the market is going to go up, down, or sideways in the near- or intermediate term future.

What we do know, however, is that occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. Therefore, we never try to anticipate the arrival or departure of either disease. Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.

When Buffett wrote these words, the stock market was at the tail end of an amazing bull market run and Buffett was seeing greed in the markets. Only eight months later, the markets quickly switched from greed to fear as “Black Monday” became one of the largest daily (percentage) declines in market history. This is another example where Buffett gave the lesson before the upcoming event.

Although easier said than done, Buffett’s advice has been excellent; we can see this in the chart below. The economics team at JP Morgan annotated the Consumer Sentiment Chart (same chart as above) with some fantastic information:

JP Morgan looked at sentiment “inflection points” representing high (greed) and low (fear) points. If you look at the low points highlighted in purple, you’ll see times marking stagflation, the deflated dot-com bubble, the global financial crisis, the Covid scare, and other highly uncertain times. The points marked in orange show times where consumers had few worries. 

JP Morgan then calculated how the stock market performed in the 12-months following these high and low inflection points. Their research showed that the negative inflection points were a great time to invest in the stock market with 12-month returns averaging 24.9% when consumers were the most concerned. On the flip side, investing when consumers were comfortable was a mixed bag with 12-month returns averaging 4.1%.

Of course, nobody knows where consumer sentiment will bottom out and past performance is no guarantee of future performance, but these numbers give me some comfort that we can see good stock market performance in the face of our tumultuous world.