Broker Check
Road to Recovery Playbook Factor #4: Pessimestic Sentiment

Road to Recovery Playbook Factor #4: Pessimestic Sentiment

March 25, 2020
Share |

We’ve been monitoring the details in our Road to Recovery Playbook closely over the past few weeks, looking for ways to opportunistically take advantage of the sharp pullback in equity prices. The Playbook has five important factors we are scrutinizing in order to be more aggressive with equity allocations. One of those factors emphasizes whether we believe there are limited sellers remaining. For clarity on that particular factor, we reviewed recent statistics from Morningstar on fund flows, and we found some interesting observations.

As shown in the below chart, investors have acted as if money markets are king, essentially selling exposure to everything else to fuel increases in allocations to money markets. Looking closer, the statistics show that investors have started to sharply reduce exposures to higher-quality taxable bonds and municipal bonds, sending the message they don’t think even those categories are safe enough in the current market environment. The weekly outflow from municipal bonds was a record, and it was nearly three times the size of the previous record set in mid-2013.

Interestingly, those outflows from taxable and municipal bonds were much higher than outflows from equities, perhaps pointing to some exhaustion on the part of those investors who had been reducing equity exposure in prior weeks. In our view, investor sentiment toward equity investments is certainly low at this point, US equities appear oversold, and there is attractive potential for a rebound in equity prices over the next several months.

View Expanded Chart.

“Although COVID-19 developments have caused some investors to shift allocations toward money markets, we recommend investors stick to their long-term investment plans” said LPL Financial Managing Director and Chief Investment Officer Burt White. “The roughly 30% drop in the stock market has approximated average historical declines tied to bear markets and recessions, and our Playbook may be close to signalling an opportune time to increase equity exposure.”

The fund flows data from Morningstar certainly points toward tepid stock market sentiment at this time, helping us build confidence that the number of sellers is dwindling. We continue to monitor our Playbook closely, particulary the first factor that focuses on line of sight into a peak in the growth of new COVID-19 cases in the United States. The ingredients for stocks to carve out a bottom and trend higher could be coming together nicely.

 

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.This Research material was prepared by LPL Financial, LLC.Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.If your representative is located at a bank or credit union,  please note that the bank/credit union is not registered as a broker-dealer or investment advisor.  Registered representatives of LPL may also be employees of the bank/credit union.These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, the bank/credit union.  Securities and insurance offered through LPL or its affiliates are: Not Insured by FDIC/NCUA or Any Other Government Agency Not Bank/Credit Union Guaranteed Not Bank/Credit Union Deposits or Obligations May Lose Value For Public Use – Tracking 1-971757