Investors Perilously Wait For Goldilocks Market

Investors Perilously Wait For Goldilocks Market

Like Goldilocks searching for the “just right” porridge, chair size, and bed, so too are investors searching for the Goldilocks stock market that is not too hot or too cold. Many are aptly calling this the “most hated” bull market in recent history as Goldilock investors have decide to stay home rather than look for an investment prize. What many investors don’t quite realize is that waiting too long for an elusive, perfect Goldilocks scenario will only lead to your portfolio getting eaten by unhappy bears.

Waiting on the sidelines for a perfect buy signal is a hopeless endeavor. The evidence for extreme risk aversion is extensive. From a corporate standpoint, it’s clear executives and board members have been scarred by the 2008-2009 financial crisis. Management teams have been quick to cut expenses and slow to invest and hire. And speaking of hiring, the post-crisis expansion has led to the slowest job recovery since World War II.

Corporate profits and margins are at/near record levels, and that means cash keeps piling up. Rather than accelerate investments, companies have by and large chosen to spend that mountain of cash into trillions of rising dividends and share buybacks.

Risk aversion is evident at the individual level as well. Part of the explanation of why corporations have increased dividends to record levels is due to 76 million Baby Boomers approaching or entering retirement. Boomers need more income just as interest rates are rapidly approaching 0%, and in many cases negative interest rates, which effectively means they are earning $0 on their bank savings and losing to inflation.

Collecting fatter dividend checks from stocks actually sounds pretty good when individual investors are scared silly about geopolitics, terrorism, elections, Zika virus, and other horror story headline of the day. Fortunately, it’s profits, interest rates, valuations, and contrarian sentiment indicators that control the stock market (see Follow the Stool), and not Fox, CNN, ABC, NBC, and internet bloggers (myself included).

With all this scary news, no wonder investors are cautious to invest. Gallup conducted a survey earlier this year asking investors whether they were invested in the stock market. With the stock market at or near record all-time highs, stock ownership should be up…right? Wrong! The Gallup results showed stock ownership at its lowest level in 18 years, as long as results have been tabulated (1998).

In case you are still skeptical, we can point to other evidence of investor skepticism. If you believe, like I do, that actions speak louder than words, then the actions of individuals are screaming with risk aversion at the top of their lungs. In order to understand how frightened individuals are, all you have to do is look at the more than $8 trillion (with a “t”) of cash sitting in savings accounts earning nothing (see chart below).

Source: Calafia Beach Pundit

Source: Calafia Beach Pundit

You can see from the chart above, the slope of cash accumulation accelerated higher after the Great Recession. Besides allowing the mountain of cash to pile up, what else have investors been doing with their greenbacks? One thing for sure is they are paying down debt (reducing leverage), as you can see from the chart below.

Source: Calafia Beach Pundit

Source: Calafia Beach Pundit

As Warren Buffett reminds investors, it is best to “buy fear, and sell greed.” There is plenty of other evidence, including the examples above, that show most average investors do the opposite…buy greed, and sell fear. Sadly, sitting on the sidelines with cash stuffed under your mattress, earning nothing and losing to inflation, is not the optimal strategy for long-term wealth creation and preservation. Investors can continue waiting for Goldilock conditions, but history reminds us that market timing, sideline-sitters are likely to get eaten by the bears.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.