It’s not easy being a contrarian. Generally, it is one of the most reliable tricks in the book: when risky markets are euphoric, sell. When they are in the depths of despair, buy.
That is always a subjective process. Right now, though, measures of the mood are throwing off so many conflicting signals that this strategy is inducing dizziness. How can you do the opposite when it is impossible to figure out whether investors are too happy or too sad?
If you ask them, in aggregate they say they’re sad. Bank of America’s always-useful monthly survey of fund managers shows that they are roughly as pessimistic about growth now as they were in March 2020, immediately before central banks rode to the rescue of the Covid-infected financial system. That sounds bad. It is bad. Good news for contrarian buyers of risky assets.
Two problems with that: One is that global stocks are already some 20 per cent higher now than they were in October. Twenty! Two-oh! Adding to that now is brave. The other is that the mood has brightened quite significantly in recent weeks. All the key measures of sentiment have improved over the past month, and shifts in asset allocation suggest a stronger appetite for risky bets, BofA says, albeit still leaving the mood “nowhere near optimistic enough” to justify bearish bets.
So, for those keeping score, investors are simultaneously sad, but not sad enough, and happy, but not happy enough. I did warn you it was dizzying.
Dario Perkins at research house TS Lombard says this is a “confusing time for investors, especially contrarians”. Quite. To him, this is because investors have been sold a dud framework for this year’s big trading themes, namely a recession narrative that simply does not make sense.
“Often such analysis was rooted in superstition [or trauma] from 2008, rather than hard macroeconomic data,” he says. Instead, we are in a “bogus” cycle, he adds, that simply will not fit the usual templates. Covid lockdowns, rapidly changing labour markets, massive swings in monetary policy and war in Europe all mean, at the risk of using a dangerous phrase, that this time is different.
“A tight labour market is certainly an argument for keeping interest rates higher for longer, but it is not an argument for trying to break the economy with endless rate hikes, particularly in a fake business cycle full of surprises,” he says. “My bet is that this confusing economy will continue to frustrate everyone — bulls and bears alike.”
For now, the bulk of the frustration is in the bearish camp. As BofA says, the “pain trade” in riskier assets for now — the path for markets that would hurt investors the most — is higher. Relatively few are positioned to benefit from a continuation of the trend that is already in place, and doubters are in no hurry to give up.
“This rally is not trusted and people are very sceptical,” says Patrick Spencer, vice-chair of equities at Baird, the privately held investment firm. Spencer has been in the bullish camp since around October, making him one of last year’s winning contrarians. He says the current rally is “the most hated bull market of all time” but it makes no sense to fight it.
Supply chains are operating much more normally, inflation has come off the boil, the Fed is dialling interest rate rises down in size, rather than up, and, on a related note, corporate America is no longer saddled with such an outlandishly strong dollar. The data on employment may also be a little funky, but the direction of travel is clearly positive. Add into the mix: China is emerging from Covid lockdowns and Europe seems to have dodged a frigid and punishingly expensive winter.
“Everybody is worried about a recession but we have been sitting here for 12 to 18 months talking about it constantly,” says Spencer. “We have seen downsizing, all the job cuts in tech . . . Companies have been dealing with it. It’s in the market. Interest rates are going up but markets are not going down and that’s a very very good sign.”
To him, the bigger danger is sitting and waiting for disaster to strike. “Everybody is waiting for the market to correct so they can get back in,” he says. “I don’t think they will get the chance.”
Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers Solutions is another unapologetic bull. “I get a lot of flak for being an eternal optimist,” he says. When he first figured that what he calls a “normal recession” was priced in to equity markets in August last year, and switched towards preferring a riskier portfolio, he says he got “a lot of hate mail, people telling me how stupid I was”.
“The big pushback I get is people say ‘just wait, the recession is coming’. OK, but you keep saying that and we’re up 20 per cent from the lows.”
People are coming around to his way of thinking now, Janasiewicz says, but many investors are “scarred” by a brutal 2022 and sense “career risk” in taking the wrong bet again now. He has a neat contrarian indicator of his own: “When I get more people saying ‘you’re not an idiot’ then maybe it will have run its course.”