Investor sentiment is readily captured by the stock market trend (both up and down), not least of all because the financial press corroborates and exacerbates the mood.
Below is a selection of headlines as the stock market bottomed during the GFC.
- January 2, 2009: “Capitalism in crisis: Is the free-market model still viable?” – Financial Times
- March 9, 2009: “Stocks plunge as financial crisis deepens; analysts fear prolonged recession” – Reuters
- January 20, 2009: “Bank of America gets $20 billion bailout; analysts sceptical about economic outlook” – CNBC
- December 20, 2008: “Jobless rate soars to 6.7% as economic outlook darkens” – Reuters
- December 4, 2008: “Is this the end of capitalism as we know it?” – The Guardian
- March 6, 2009: “The collapse of capitalism: Can it be saved?” – Bloomberg
In the ensuing months economic growth recovered and the stock market rallied, subsequently rising +150% over the next decade. What is the lesson? The narrative is a lagging indicator, not a predictive one.
The mood in smaller industrial companies is profoundly, and almost universally, negative. Share prices have been smashed and stock trading volumes decimated. It’s easy to believe that this will continue (and it might) but with the S&P/ASX Small Industrials is down 26% since September 2021, the market has already priced-in a lot of negative news.
We don’t know what the future holds, and we are sceptical of anyone that claims to know, but after 15 years of underperforming large caps and after the second longest draw down in 20 years, there is a risk that investors have become morbidly fascinated with the bad news and have started to assume that because things have been bad, they always will be. History suggests otherwise.