Valuations and tech stocks' volatility are two major current fears, so when a recent survey found 18% of fund managers thought tech was currently a bubble and more than half thought the sector expensive, folks unsurprisingly latched on and presumed it meant a storm was gathering. But before you presume this means the "smart money" is headed for the exits, let's put this survey in some appropriate context.
To us, when taken in that appropriate context, it's clear surveys are unlikely to tell you where the market is headed--a point media seems to miss. Instead, they are a sentiment indicator, and if most folks fret high valuations or froth, chances are good you don't need to.
The survey in question -- Bank of America Merrill Lynch's Global Fund Manager Survey (FMS) -- asks participants that range from fund managers to Chief Investment Officers about their current views on stock valuations, popular trades, tail risks[i] and portfolio positioning, among other topics.
June's report is making headlines because 44% of 210 respondents say equities are overvalued: the highest response on record. Combine this tidbit with other findings -- like 57% believing Internet stocks are expensive, 18% calling them "bubble-like" and 38% thinking the most popular trade right now is a play on tech rising for the foreseeable future (via being long the Nasdaq) -- and the comparisons to the late 1990s tech bubble seem obvious.[ii]
While we have no qualms with the FMS itself, we are generally skeptical about drawing any big takeaways from surveys because of their natural limitations. Surveys reflect how respondents feel at one particular time, which is often tied to what just happened or what they're hearing.
But feelings can change quickly! If stocks enjoyed a week-long hot streak, investors are probably feeling pretty good. They'll probably feel the opposite way (and then some) if markets pulled back a bit. Or, for a bunch of contrarian fund managers, maybe a big run sparks fears of "crowded trades," while a pullback inspires visions of opportunities.
However, historically speaking, acting on the FMS's findings of the day wouldn't have worked out too great for investors. Consider some of those feared "tail risks" in past months: EU disintegration (February - April 2017, October 2016); the GOP winning the White House (July - September 2016); Brexit (May - June 2016); and a China recession (October 2015 - January 2016).
While many respondents feared these long-shot possibilities as major market risks, the ones that actually became reality -- e.g., the GOP winning the White House, Brexit -- haven't derailed the expansion. Also, a majority of survey respondents have been calling stocks "overvalued" since 2013. Yet the global expansion and bull market have charged higher since then, so the rationale to worry about "expensive" stocks seems a wee bit off.
That said, our main issue isn't with the survey's takeaways, but with the media's spin on it all. The FMS is likely getting a lot of attention right now because of some convenient timing. The survey period was from June 2 through June 8, and the day after the field work was finished, Tech had its roughest day in a while -- giving the entire financial media plenty of fodder to bang on about Tech stocks and fading momentum. Here is a snippet:
- "A Record Number of Investors Say Stocks Are Overvalued"
- "One in Five Investors See Internet Stocks as 'Bubble-Like'"
- "Lots of People Think (Tech) Stocks Are Overvalued"
- "A Record Number of Investors Believe the Stock Market Is Too High, Survey Shows"
However, this conflates coincidence with causality -- a common media practice that investors should refrain from. Markets are volatile from day to day and trying to find meaning in daily movements (positive or negative) is myopic. Media also cherry-picked and stressed some points but were light with some important context.
For example, even though 75% of participants think Internet stocks are expensive, FMS respondents' biggest portfolio overweight is technology -- and overall portfolio allocation to tech actually rose on a net basis from May to June. While this rise may have been more due to market movement since FMS respondents indicated they didn't actively increase their positioning, tech still remains the biggest overall sector overweight for these managers -- a tidbit that didn't make it to most headlines.
And it isn't as though this is a new theory: Just a couple months ago, headlines blared that one in three investors thought stocks were overvalued -- the highest in 17 years -- and that U.S. stocks were looking quite expensive. Yet for all the hand wringing, U.S. stocks haven't crashed over the past three months.
In our view, surveys like this are useful when trying to gauge broad sentiment. When a minority of respondents think things look bubbly -- but the dominant reaction to it is fear or worry -- it shows overall sentiment is still far from euphoric. Constant bubble chatter also tends to be self-deflating.
When a true bubble is forming and optimism turns into blinding euphoria, investors -- pros and amateurs alike -- lose sight of fundamentals and see only upside ahead. In this environment, media trumpet stories about the "New Economy," and those who preach caution or are bearish are ridiculed and/or outright ignored.
We don't look close to that type of environment right now. However, the closer we get to the next bear market, the more media's consistently dour messaging may leak credibility -- to the point where folks tune out the noise altogether and aren't listening by the time the warnings are right. If that shift in sentiment happens, it would be a development for investors to monitor.
[i] An unlikely event that would be a big market negative.
[ii] Some other interesting findings beyond tech: Fewer pros are optimistic about stronger global economic growth over the next 12 months and the biggest long-shot fear is negative fallout from Chinese credit tightening. Two solid bricks in the Wall of Worry this bull market has climbed over the past eight years!
Fisher Investments is an independent, fee-only investment adviser serving investors globally. To learn more about Fisher Investments, please visit www.fisherinvestments.com.
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