Caution Still Rules the Day

In 1979, Business Week famously proclaimed “The Death of Equities” on the cover of its magazine.  While this proclamation did not happen exactly at the major bottom of the market, in historical terms it was quite close:  the market embarked on a secular 20-year bull move a little more than a year thereafter.

Today, we don’t hear about death of equities from major publications, but investors are still extremely cautious.  And who can blame them?  After experiencing market collapse in 2008, we had flash crash in May, and persistent worries about state of U.S. and global economy, such as possibility of default by PIIGS nations in Europe and fear of double-dip recession here in the U.S.  Stocks produced zero return over the last 11 years. So it is not a surprise that investors pulled out $38.5 billion out of stock funds this year.  I also have personal and anecdotal evidence of this — I see people pulling out of stock funds in their 401(k) plans and reallocating proceeds to bonds and cash, or selling their investments to pay down the mortgage or buy an investment property.

From a contrarian point of view, however, there is a silver lining in this behavior.  It is a sad but true fact that the majority is often wrong about their assessment of market prospects.  The fact that risk intolerance and high caution rule the day today may well indicate good prospects for equity investors.  Just contrast today to heady days of 2000 when everyone and their brother had a hot internet stock tip.