Investor Confidence: Where Are We?

Investing is about the future. 

The simple rationale for investing is that, over-time, you absolutely need to grow the value of your money at or better a rate of return than the increases that will occur in your cost of living. 

Ultimately, when you no longer have employment income, you will have to then depend upon your savings and /or pension plans to provide you with the means with which to enjoy a comfortable lifestyle.

We invest in companies (buying their stocks and bonds) in an effort to give us a future cash flow, dividend income, interest income and also the potential for capital appreciation. This requires a leap of faith, to a degree, that the financial system will continue to provide these (as it has for the most part through history) positive returns.

Through a good portion of 2008 and early 2009, investors (especially investors in the the stock market) lost confidence in the global financial system to provide the growth they were looking and hoping for.

The very extraordinary actions of the world's major central banks helped, over time, to restore some level of confidence that the global financial system would not collapse.

Needless to say, for some, confidence was gradually restored and from 2009 until the end January of this year (with a few minor relapses), confidence had been growing steadily.

The Trump era brought on further confidence (for many) in so far as that what he intended would be economically beneficial: deregulation, tax cuts and infrastructure spending. There were some, however, who were somewhat concerned about his foreign policy initiatives.

Nonetheless, the expected increase in corporate earnings was taken very positively. So much so that stock prices reached levels on a price to earnings basis (in January) that were close to all time highs. Some might suggest that we moved into an area of "over" confidence.

Confidence took a hit in February and March as political rhetoric flared over trade tariffs and protectionism (among other things) and subsequently, stock prices have returned to levels that are more in line with the last 5 year averages (green dotted line in chart below). Still expensive relative to 10 year averages (blue dotted line in chart below):

The investment community is mixed on its outlook from here:

A poll released by Wells Fargo / Gallup in late March claimed that investor confidence was at 17 year high. However, Eurozone investor confidence, according to a report this morning has fallen in April, which was apparently unexpected.

By and large, most participants in the stock market want stock prices to rise, because the majority of participants are owners of stocks. The likelihood of getting any truly honest feedback on this front may be limited to the bias that participants carry with them.

Of course there are also the contrarians, who see high levels of investor confidence as a reason to be bearish. Most likely they are positioned according to their respective views / bias as well.

Earnings expectations for the S&P 500 companies are expected to grow at a rate of 18.4% through 2018. This of course is largely based on the tax cuts and deregulation being put into place by the Trump administration.

This is a fairly lofty expectation that, if not met, may also take a tole on confidence. So we will have to look for possible revisions as the year progresses.

At High Rock we remain cautious (which is our bias). We know that stock markets always over-shoot both to the upside and the downside because of the emotional element that plays into trading / investing. That is why we are currently carrying more cash in client accounts which we can put to work when markets offer the opportunity to make purchases with better value.

When markets are making lower highs, it suggests that there is less buying strength (and better sellers) when prices rise. If markets start making lower lows (and break through buying support), it will show us that confidence is slipping and will likely encourage more selling.

When everyone else is selling, that, historically, has turned out to be the best time to be buying (especially over the longer term). So we will be patient and let the market and confidence levels determine appropriate buying points upon which we will wisely invest our and our clients excess cash.