The Wall of Worry (Redux)

In more than a few client meetings, we have found ourselves saying that if you only looked at the headlines and what was going on in the media/politics/geopolitical front, you would probably conclude that the stock market is doing horrible. But in fact, the market has continued to do quite well amidst a broader backdrop of uncertainty, trade disputes, and dysfunction in Washington.

This is a classic example of the ‘wall of worry’ idiom that we frequently mention. In market speak, it is often said that “bull markets love to climb a wall of worry”. In lay terms, it means that there exists significant skepticism among investors and for that reason stock prices have yet to reflect all the good news/positive fundamentals and are not yet fully priced. When markets peak, it is often because the investing public has become ebullient and begins to chase stocks higher without much regard for value (i.e. – the fear of missing out, or greed). That definition seems an order of magnitude away from the environment investors find themselves in today.

There are several examples of the current level of skepticism among investors. A brief list of them would include items such as:

• The P/E ratio for the S&P 500 Index is roughly 17x FY2020 EPS estimates; most bull markets end with much higher valuations for stocks
• More bears than bulls in the AAII survey for 8 of the last 10 weeks
• Levels of bearish put option purchases are back near historically elevated levels
• Money flows out of equities and into bonds have dominated monthly fund flows for years (not what one usually sees during strong bull markets for stocks)
• Net stock exposure at large hedge funds is near-decade lows

While the above list is by no means exhaustive, it does highlight some distinct characteristics of this market that stand in stark contrast to past bull markets reaching record highs. There is very little enthusiasm among the investing public, as well as professionals. Most folks with which we speak are cautious and skeptical. They are investors who are trying to stay invested in a small way, but with one foot out the door and ready to bolt at a moment’s notice.

Similar levels of skepticism can be found when looking at the economy as well. This is the first business cycle we can remember when so many people are trying to predict the timing of the next recession. A recent search on Google Trends shows the highest number of people searching on the term “recession” since 2008. On CNBC, seemingly every guest is asked when they see the next recession hitting. Since consumer spending accounts for 70% of US GDP, we need to be careful not to scare consumers and talk ourselves into a recession!

Considering this is now the longest expansion in U.S. history (124 months), it is human nature to question how long it can last. But people sure do seem more worried about the ensuing hangover than they do enjoying the current party. Usually, when the market is hitting record highs investors are scrambling to participate and projecting the good times to continue. Maybe the experience of 2008 remains a constant reminder, causing investors to obsess on getting it right this time around.

The markets are entering what is usually a strong seasonal period (2018 notwithstanding) for stocks. Additionally, election years often see the incumbent doing everything possible to keep the good times going, which increases the odds of reelection. So, for now, we do not see the need to make any major changes to our asset allocations. There will definitely be a time to get more defensive but given the firm ‘wall of worry’ in place, there is still likely some upside left in which to participate.

Jordan L. Kahn, CFA
Chief Investment Officer


Sources:; Seeking Alpha; Raymond James;; Standard & Poors; Barron’s; Charles Schwab;
*This Market Monitor is provided for informational purposes only and should not be interpreted as investment advice.