The Recent Warnings

According to the American Association of Individual Investors, just 18% of people expect stocks to rise over the next six months. Retail investors haven’t been less enthusiastic about the market since 2005. The chart below from Goldman’s “The Last Innings” shows a similar picture of how lukewarm mom and pop investors are on stocks.

While the retail investor might not be outright bearish, it seems as if the smart money is less hesitant to show their claws. Between the RBS “sell everything” call and the recent Bearron’s round table, gloom is in the air. So what’s driving their recent warnings?

Is it the decimation of commodities? The weakness out of China? The end of accommodative fed policies?  While it’s difficult to say exactly what’s causing the recent selling, I think it’s pretty obvious why some are so quick to extract the current weakness out into the future.

The reason we’re hearing so many vocal bears- in my view, is that scars from the two recent fifty percent declines still haven’t fully healed. Nobody wants to be on the wrong side of a third bear marker in less than twenty years. These warnings may turn out to have been very prescient calls, who knows? The point is, it’s not just individual investors that can be infected with recency bias.

Stocks can suffer without a recession, as my friend and colleague Ben Carlson pointed out last night. What we’re very unlikely to ever see, however, is a correction without bear market calls, or a bear market without end of the world calls. As Phil Pearlman likes to say, “the higher the VIX, the higher the clicks.”