Stock Expectations Hit a Decade-Plus Low, But a Rare Opportunity for Investors
When expectations hit rock bottom, no one can push prices down further.
Event Review and Expectation Analysis
The recent shift in market sentiment is noteworthy. According to the latest data, nearly half of the investors anticipate a decline in stock prices, a proportion that has reached one of the historical highs. This expectation is largely influenced by recency bias—during economic booms, market participants tend to expect continued growth; whereas in economic downturns, negative expectations tend to intensify.
Logic and Opportunities of Contrarian Investing
The essence of contrarian investing lies in capturing the extremes of market expectations. When market expectations hit rock bottom, it often means that prices have fully reflected, or even over-reflected, pessimistic sentiments, with limited further downside potential. At this point, the market is more likely to experience a significant reversal rather than continuing the current trend. Currently, the extreme pessimism in the market provides a rare entry opportunity for contrarian investors.
Data Support and Historical Experience
The latest survey by the Conference Board shows that in April, 48.5% of respondents expected stock prices to fall over the next 12 months, a level not seen since 2011. Looking at historical data, since the indicator began in 1987, such a situation has only occurred eight times. Buying during these extremely pessimistic periods often results in significant excess returns.
Market Performance and Future Outlook
Despite recent market volatility, the U.S. stock market remains an excellent choice for long-term asset allocation. Purchasing during similar contrarian opportunities can significantly enhance investment returns.
Similar setups led to 8.6% gains in three months, 11.7% gains in six months, and 10.7% gains over a year. In all cases, that's solid outperformance.
Now, the interesting thing is that the six-month returns are higher than the one-year returns. That's because we had one very bad signal in February 2008... before the worst of the financial crisis. In that case, stocks fell 45% over the next year.
If we remove that signal, the one-year return jumps to a much more impressive 22.3%. Of course, we can't just remove signals. But this nuance tells us that if we don't see a 2008-style crash, the outcome is likely great for stocks going forward.
Investment Strategy Recommendation
The current extreme pessimism in the market offers a rare opportunity for contrarian investors. Investors should decisively buy when market expectations are at their worst, seizing this rare and strong contrarian signal to achieve significant excess returns.
In any case, we want to buy when everyone else assumes the worst. That's the key to contrarian investing. And right now, we have a rare and powerful contrarian signal. Don't miss it.
For SG users only, A tool to boost your purchasing power and trading ideas with Cash Boost Account!
Open a CBA today and enjoy access to a trading limit of up to SGD 20,000 with upcoming 0-commission, unlimited trading on SG, HK, and US stocks, as well as ETFs. Find out more here.
Other helpful links:
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.
