Fear: A Very Powerful Emotion

After about six months of relentless sell-offs, the typical investor has caved in to negativity. Many have sold off big percentages of their stock, fund and ETF positions if not exiting them entirely. The CNN Fear & Greed gauge is now at the extreme fear level. That simply notes investor sentiment, which is a contrary indicator. Psychologists often speak about the acronym FEAR as False Events Appearing Real. Think back to March 2020 and Hedge Fund manager Bill Ackman's We're going to hell diatribe. It was replayed dozens of times that month by CNBC, scaring the bejeezus out of most traders. Did his prognostications of much further share price damage come true? Nope. March 23, 2020, marked the exact nadir of that extremely brief bear market. False evidence that the market had only begun to plunge induced fear, the emotion, and kept most people from buying at incredibly favorable prices. Even Warren Buffett fell into that category. He sat on greater than $140 billion in cash from March 2020 right through Dec. 31, 2021, when bargains abounded. Lately, he finally put about one-third of his cash stash to work at prices at least double what he could have bought for earlier. Safe Haven Demand logs the spread between stock and bond performance over rolling 20-day time frames. Wednesday, May 11, saw the most negative reading on that gauge in well over a year. As with the fear gauge, it too, is a contrary indicator, signaling we're at, or near a final bottom. Market Breadth measures up to down volume of all major stocks traded. Last week's reading was also at the lowest in more than 12 months. That indicates extreme fear, which is a very good thing. Almost everyone who wanted to sell has already done so. Keep in mind that there are buyers for each share being disposed of. The smart money has been quietly accumulating huge positions at fabulous prices. They love the fact that most people are desperate sellers. That is why you rarely hear anyone on CNBC or Fox Business voicing bullish positions. Why entice competition for buying what you'd be happy to acquire even more cheaply? Putting money to work when the broad market is well below its own 125-day moving average has always worked out well for those with 12 - 18 month time horizons. Upturns often take place much quicker than that, as was the case after Christmas Eve 2018 and in following March 23, 2020. Traders are typically an upbeat group. They usually buy many more call options than put options. Only after major downturns do they tend to buy protection in quantity. Professional investors know from experience that the public is almost wrong when trading options. High put-to-call ratios like we've seen lately are yet another signal that we're at, or near, the final lows. Last Thursday afternoon through Friday's all-day rally might have marked the dead low for this painful bear market as the morning of May 12. We'll need time to confirm that, but it wouldn't surprise me if that was it. What about the runaway inflation we've been seeing? Isn't the Fed going to push rates up dramatically like it did in the early 1980s? I'm guessing the Federal Reserve will continue talking tough while spinning out a couple more 50-basis point hikes. After that, though, they can't really continue on the Volker path a la 1982. Why not? As of May 14, our national debt was almost $30.5 trillion (with a 'T'). That represented almost 129% of GDP. Every 1% rise in debt service costs will sap over $300 billion per year from the Federal budget. Going back to 5% would mean incurring an extra $1.5 trillion a year in debt service expense. There is no political will to gut all normal government spending simply to pay higher interest rates on the $30 trillion and rapidly rising national debt. The days of near 0% rates here in America, and negative interest on European government paper are gone. That circumstance allowed for unbridled government spending as any number times a 0% interest cost is zero. Despite the Fed's insistence that it is devoid of politics, the possibility of tanking the federal budget by sharply raising rates is simply not going to happen. Fear of much higher interest rates will likely prove to be just more fake news or false evidence, which ends up being disproved. Inflation is very real and is far from transitory. Official CPI-U numbers clearly understate what is already 10+% increases in the true cost of living. Staying in cash virtually guarantees substantial loss of buying power. Ditto for bank CDs and investment-grade bonds which still have coupon rates well below realistic levels if true auction pricing existed anymore. Owning equities is the best way to combat inflation. Most companies have been raising prices fast enough to overcome inflation in raw materials, shipping costs and employee wage increases. There are hundreds of firm's making all-time record profits right now. The key to future stock market success is to stick with shares of healthy, not debt-laden firms, with pricing power. Companies that are unprofitable and likely to stay that way for the foreseeable future are vulnerable to eventual bankruptcy. They need new debt to fund losses and junk bond rates have already escalated to double-digit coupons. Carvana recently had to pay 10.25% to raise $3.3 billion. Cost of capital that high can put unprofitable firms out of business. Who will step up to lend to Peloton , Beyond Meat or Coinbase Global at reasonable coupon rates now? Zero Interest Rate Policy kept many of these zombie firms going long past when they should have died of natural causes. Expect a migration away from risky names into solidly profitable ones which are in the value camp rather than high-multiple growth stocks. That is exactly what happened from the internet/tech bubble bursting in March 2000 through 2006. Fortunes will be made or lost by positioning correctly for what lies ahead. Stop believing the same fear mongers who kept you from buying at previous scary market bottoms. Go with documentable true facts on companies which are thriving now and appear positioned to extend their success. See my history of articles to know what I've been buying with my own cash recently. I remain wildly bullish and would not be surprised if 2022 plays out like 2016 did, with solid gains looming on many unjustifiably beaten up stocks.

Fear: A Very Powerful Emotion

The typical investor has caved in to negativity. Many have sold off big percentages of their stock, fund and ETF positions.

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