Stocks are setting up for the good.
Even though it appears all bad.
No one will argue it’s been mostly bad in September.
The three key market barometers – the NASDAQ Composite, Dow Jones Industrial Average, the S&P 500 – will end September with one of their worst outings in recent memory.
The relentless selling over the past four weeks (six, really) has taken a toll on investors’ psyche. A high percentage of them find themselves addled by pessimism.
CNN’s revealing Fear & Greed Index offers a glimpse into the extent of the problem.
Additional evidence of soul-crushing pessimism is found in the American Association of Individual Investors (AAII) Sentiment Survey.
The latest AAII Sentiment Survey shows that 60.8% of those surveyed describe their six-month outlook for stocks as bearish. This marks the highest percentage of bearish sentiment since the depths of the market correction in 2009.
I was curious to see who all this pessimism has coalesced to impact the entire stock market.
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It has impacted it as you might expect.
I recently ran a screen on 8,000 exchanged-traded stocks to see what percentage traded at a significant discount to their 52-week high.
My screen showed that a third of the 8,000 stocks trade at a 50% or more discount to their respective 52-week highs. More than half trade at a 30% or more discount.
To belabor the obvious, pessimistic investors have done a lot of selling this year.
I Did Say That It Was Setting Up for the Good?
When I’m looking to buy, I get up in a down market.
For one, value goes up when prices go down.
Stock prices are more reasonable today than they’ve been for the past 10 years.
The forward 12-month P/E multiple for the S&P 500 is down to 15.8. The multiple today is below the five-year average (18.6) and the 10-year average (17.0)
AAII’s data show that when that sentiment is extremely bearish (as it is today) the S&P 500 has gone on to post above-average returns over the next six- and 12-month periods.
But what about a recession?
I think we’ll have one, if we’re not experiencing it already.
But that’s not necessarily bad news for stocks.
Stocks usually bottom about six-to-10 months before the economy bottoms.
Surprisingly enough, stocks have rallied 50% of the time during a recession dating back to 1948.
Here’s another reason to consider buying at the lower prices today.
The average one-, three-, five-, and ten-year forward returns for the S&P 500 following a recession are +20.9%, +48.6%, +93.5%, and +256.4%, respectively.
What’s Warren Buffett Doing?
Perhaps he is of a similar mindset as I am.
Berkshire Hathaway’s (NYSE: BRK.b) latest SEC filing shows the company bought another $350 million worth of Occidental Petroleum (NYSE: OXY) shares. I have seen no filing that suggests any selling.
I suppose we can infer that Buffett is more interested in buying than selling. I can understand why, given the values on offer today.
I, too, have been buying. I expect to buy more.
Perhaps you might consider doing the same.