No Love for Stocks. Great!

Stocks staged a powerful rally in 2012, with S&P 500 rising 10% year-to-date.  Yet most investors are not impressed.  After many years of high volatility and sideways markets, they continue to pull cash out of equities and putting it into bonds.  And I think this is great news for stocks.

According to a CNN Money article, “Retail investors are coming from an incredibly depressed mindset.  The only thing that will change that is a prolonged period of excellent performance in the equity market.”  Indeed.  You can rest assured that after such a prolonged period, after an average investor finally is excited about market prospects, then it would be time to get cautious.  I have personal evidence of this: I saw many people putting their money to work in the stock market in 2007, right near the top.  Of those, quite a few are choosing to pull out now, after five years of near-zero returns.

The fact that scepticism currently abounds is very comforting to me as an equity investor.  While a correction can happen at any time (in fact, one is probably overdue by now), such widespread caution is a sign that stocks have more room to run.  Indeed, even after a pretty good advance from the lows of last summer, stocks continue to be very reasonably priced, because earning have been also rising very strongly.

Finally, for a longer-term view, take a look at my post from last summer.  While we are currently still in the secular bear market (despite the recent rally), chances are that we are much closer to its end and ready for a rebound.