John Manley

Upside down: Understanding the market by imagining its opposite

AdvantageVoice® Blog—2-19-13
John Manley, CFA, Chief Equity Strategist

Yet let's be content, and the times lament, you see the world turn'd upside down.”—“The World Is Turned Upside Down,” 17th century English ballad

I must admit to being a bit amazed by the persistence of the equity market’s rise this year. “It should not have happened.” Just ask the investors who are out, looking in. The true bears will tell you that it is rising on hot air and high hopes: “Just wait until something happens.” The hesitant bulls will tell you that they cannot wait to buy stocks on the first dip or in the second half of the year, whichever comes first. They both agree that equities are overdue for (at least) a correction.

I know that corporations are very profitable by historical standards. I know that world-wide economic growth is far from robust or certain. I know that most major equity indexes are up an awful lot in the last three months and are approaching their all-time highs. I also know that I am not the only one who knows these things. In my opinion, investors are still very aware of the issues and the problems that the world faces. I also believe that, until recently, very little thought has been given to their solutions or resolutions.

Still, buying into a market that has risen as much as this one has is difficult. Wouldn’t that represent a capitulation? In my opinion, while there is no easy answer to that question, some advice that I was given long ago might prove helpful.

As a young analyst, I was told that, to better understand the consequences of some recent events or occurrences, I should ask myself what I would think if the exact opposite had happened. If I thought the news was good, would I think it were bad if things had gone the other way? It is a reality check.

Applying that check to the current situation, what would I think if the market had begun 2013 with two big down days and then proceeded to dribble slowly but unrelentingly lower? What would I think if flows into equities, which had been strongly positive for months or years, suddenly and sharply turned negative? What would I think if, after years of clear and consistent economic sailing, things seemed to be clouding up a bit?

Well, I know this is all hypothetical, but I think I would be justifiably scared. I would probably think that a lot of money wanted to get out of the stock market and that there could be a lot of money behind that ready to head for the exit. I probably wouldn’t think it was too late to sell, even if I were afraid of being whipsawed by an oversold bounce. Fear may have a sharper edge than greed, but I would want to be raising cash to protect what was left of my fortune.

So flip it around again and here we are. The world’s central banks are, and will likely remain, in very accommodating stances. That liquidity is looking for somewhere to go. Many individual investors, with the pain of five years ago still fresh in the minds, have been settling for the most prosaic (low-yielding cash equivalents and Treasury securities) or the most exotic (illiquid complicated private placements) investments in order get some return on their money and avoid the perceived risk of stocks.

I think that, by ordinary rules, the equity market is overdue for a correction and that it could occur at any time. On the other hand, I see a lot of people on the outside (of the equity market) who could be looking to get in sometime in the not-too-distant future. Maybe I should be there before they arrive.

The views expressed are as of 2-19-13 and are those of Chief Equity Strategist John Manley, CFA, and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.


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