Market players looking to cheer up should take a close look at just how miserable most investors are.
The three-month collapse in stocks, punctuated by searing day-to-day volatility, may or may not have properly priced in an appropriately dimmer outlook for economic growth and policy risks.
But the bear raid has undeniably shredded the nerves of investors, sapped risk appetites, built a tall wall of worry, replaced greed with fear — to the point where overall Wall Street sentiment has reached a zone where it represents a bullish factor for forward returns. If nothing else, it means incremental bad news — trade standoff, more corporate profit warnings — won't come as much of a shock.
In most cases, the level of pessimism as gauged by surveys, fund flows and professional investor positioning has reached readings comparable to prior serious market setbacks outside of a recession: 2015 to early 2016; late 2011; and 1998.
A collective bad mood helps create a good setup for powerful recoveries after those market gut checks, typically because negative sentiment has usually accompanied concentrated bouts of selling that don't last long without at least an interim reversal.
Global strategist Michael Hartnett of Bank of America Merrill Lynch — correctly bearish for many months — said Friday morning was "time to buy" for a tactical bounce based entirely on heavy fund outflows, overwhelming pessimism and brutal losses already booked in global stocks. Not the ultimate low, he says — for that we need profit forecasts to trough and the Federal Reserve to step away entirely and maybe go to an easing bias.