Unloved Bull Markets. Craig Callahan
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advanced off the September 2002 low, investors sent net positive flows into equity mutual funds, not to the extent seen in the late 1990s but still enough to reflect confidence and optimism for equities.
Compared to the previous bull markets post 1987 and 2002, what makes this recent bull market “unloved”? The surge off the market low in early 2009 barely got net flows positive, but 2010, 2011, and 2012 saw a race for the exits even though the market moved higher. Unable to see the multiyear bull market ahead of them, the only emotions investors were capable of was simply, “Get me out of here!” Only one year, 2013, saw significant net positive flows, but after that brief period of confidence in equities, investors reverted to a negative view, especially in 2016, 2017, and 2018. These net redemptions were clearly early as the S&P 500 hit an all-time high February 2020 and those who redeemed along the way did not participate.
Outflows continued as the market moved higher in 2019, as reported in the Wall Street Journal December 9, 2019, in a front page article with the title “Individual Investors Bail on Stocks.” “The S&P 500 is having its best run in six years, but individual investors are fleeing stock funds at the fastest pace in decades.” It continued, “Investors have pulled $135.5 billion from U.S. stock-focused mutual funds and exchange traded funds so far this year, the biggest withdrawals on record, according to data provider Refinitiv Lipper, which tracked the data going back to 1992.”
Table 1.1 shows the average annual net flows into equity mutual funds for four bull markets. It was positive for the previous three bull markets but negative for the most recent one. The market was moving higher but investors were fleeing equities, unusual, but explained by investor sentiment in the next section.
Table 1.1 Average Annual Net Flows (in $ Millions)
| 1984–1987 | 12,649 |
| 1988–1999 | 106,520 |
| 2003–2007 | 132,040 |
| 2009–2019 | −112,279 |
Investor Sentiment
The America Association of Individual Investors (AAII) conducts a weekly investment sentiment survey of its members. It asks, “Are you bullish, neutral, or bearish?,” meaning, does the respondent think the stock market is going higher, sideways, or lower? The survey began July 1987. Figure 1.2 shows a rolling four-week average of the percent bullish divided by the percent bearish from July 1987 through February 2020. The middle line is the average for the entire time period, right near 1.50%, meaning typically three bulls for every two bears. The other two lines are one standard deviation above and below average. Before focusing on the recent bull market, some general observations are noteworthy. This group can really be wrong sometimes. The two arrows above highlight some extremes like the excessive bullishness precrash 1987 and at the tech bubble peak of early 2000. Those were terrible times to be bullish. The four arrows at the bottom represent great buying opportunities when the market went higher but investors were extremely (incorrectly) bearish: 1990, 1998, 2003, and 2009.
Figure 1.2 AAII Bull/Bear Ratio, Four-Week Average
For the eleven-year bull market from 2009 through 2020, the bull/bear ratio is generally below average. There are a few quick bursts of optimism, when the bull/bear ratio got one standard deviation above the long-term average, but the optimism is nowhere near the magnitude or duration of those that occurred in previous bull markets. This group was mostly wrong the entire way up, frequently posting bull/bear ratios one standard deviation below the historic average.
Table 1.2 shows the average bull/bear reading during four bull markets based on the weeks when the bull market began and ended. Perhaps the bull market of December 1987 through February 1994 was “unloved” also because its average bull/bear ratio was similarly low as the recent bull market. In Chapter 2 we make the case that the sharp market drop in October 2008 was a “crash” and similar to the crash of October 1987. Perhaps severe sudden drops in the market affect investors’ sentiment for the subsequent bull market. Maybe crashes inflict some psychological damage. In any case, investors were much more bullish during the bull markets of the late 1990s and early 2000s. In summary, during this recent bull market, investors usually, and incorrectly, thought the market was going to go lower. We can only presume that they did not fully participate in the bountiful returns. That would seem to qualify as “unloved.”
As evidence that the bull market was “unloved” we saw investors pulling money from equity mutual funds unlike during previous bull markets. Investor sentiment explained that behavior because investors had a more negative view of the market than in the previous two bull markets. This doubt and skepticism were not limited to the individual investor. Some institutional investors, acting as fiduciaries and often presumed to be more sophisticated, demonstrated the same lack of love for equities.
Table 1.2 Average Weekly Bull/Bear Ratio (in %)
| 12/1987–2/1994 | 125.0 |
| 12/1994–3/2000 | 188.3 |
| 9/2002–10/2007 | 174.5 |
| 3/2009–2/2020 | 126.3 |
Public Funds Pension Plans and Endowments
Public Funds are pension plans for state and local governments and professionals like firefighters and police. Employees are elected to a board that manages the plan, usually with the advice of a pension consultant. Public Funds Data, a website, provides data on more than six thousand of these plans nationwide. Figure 1.3 shows equities as a percent of assets for those plans from 2001 through 2020. During the bull market from 2003 to 2007 the plans held about 60% of their assets in equities, but after the bear market of 2008, the percentage dropped to near 50% and gradually drifted lower as the stock market moved higher. By tracking equity asset percentage, we can measure the confidence institutional investors had in the market. If they had believed in a continuing strong stock market, they could have increased the equity exposure back up to 60%, but they did not. In fact, equity exposure trended lower during the eleven-year bull market.
Figure 1.3 Public Funds, Equities as a Percent of Assets
It appears the decreased equity exposure cost the pension plans returns for the benefit of their constituents. As public funds diversify among asset classes that historically have underperformed equities, such as bonds, some alternatives, and some real estate, it is normal for them to lag an all-equity index during a bull market. From 2003 through 2007, average annual return of public funds was 9.78%, lagging the S&P 500, which averaged 13.15% per year. From