Why does it feel like every time stocks falls a little, they’re going to fall a lot? This is probably a permanent feature of the stock market, but it seems like that drum is beating very loud these days. I believe there are two main reasons why some investors have three feet out the door.
First, everybody knows stocks are overvalued. Or, said more accurately, everybody knows that stocks are trading at a higher multiple than they have historically. It’s hard to go a day without seeing an article referencing the CAPE ratio. The chart below from Bank of America Merill Lynch shows that 37% of fund managers they surveyed think stocks are overvalued, the highest reading since January 2000.
So stocks are expensive and people are waiting, nay, begging for them to come down. This, coupled with the fact they haven’t pulled back in so long has created a weird feedback loop where the lack of movement is making some investors paranoid. It “feels” like there is a rug-pull moment coming any day now.
A few interesting statistics on how calm the market has been; There has been just one -1% day in the S&P 500 in 2017 (Today could be the second). Up until this point in 2016, the S&P 500 fell 1% 17 times.
I was surprised to find that the S&P 500 hasn’t had a 5% pullback since July 2016.
The chart below shows that the index gone 215 days without a 5% drawdown, which is the longest streak since 1996!
The chart below shows the two previous streaks that lasted at least as long as the current one. There was no rug pull in 1994 or 1996, both ended with drawdowns less than -10%. Obviously this provides us with us no information as to how this will play out, such is the nature of historical data.
Stocks are expensive yet they have refused to go down, and the noise coming out of Washington probably isn’t helping investor psychology. It’s difficult to stay invested these days, but isn’t it always.