Another factor we look at is the ‘sentiment’ of investors in general.  The more negative the outlook, the more encouraged we tend to be, playing on the age-old belief that investors are most optimistic at market tops and vice versa.  So we found it interesting that The Financial Post recently ran an article called ‘The top 10 doomsayers on Wall Street — and what they’re saying.’  As stocks sit near new multi-year highs, many investors regret ever heeding the warnings of the skeptics, bears, and outright doomsayers.  Nevertheless, Wall Street’s most well-known naysayers continue to warn that we are only increasingly exposing ourselves to risks as the U.S. national debt passes $16 trillion and the Federal Reserve’s unconventional monetary policy takes us into uncharted waters.  While there will always be both optimists and pessimists among us, the chart below shows that there are definitely way more of the latter lately, which is probably good news for most investors.  The BAML Sell-Side Consensus Indicator at the end of August showed the most pessimistic outlook for stocks on record, well below the bearish level seen at the last major market bottom in March, 2009.  As a contrary indicator this has to be a very bullish sign for stock investors.

Investor Pessimism at All Time High

Coming to the end of the third quarter, what is the outlook for the rest of this year for stocks?  “October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.”  So wrote Mark Twain, ruefully, given his unfortunate experiences in investing.  While the most memorable stock market crashes took place in October — 1929, 1978, 1979, 1987, 1989 — markets often peaked during the prior month before starting their steep slides.  However, just like the ‘Sell in May and Go Away’ platitude may have worked well on average over the past 50 years, that is not enough reason to assume it will work every year and then invest on that basis.

While there is no shortage of events that present risks for stock investors – including the looming U.S. elections, the ‘fiscal cliff’, the European bailouts and the growth slowdown in China – the 4th quarter has also tended to be the strongest quarter of the year for stocks as investors look ahead to next year and hope that conditions will improve.  With interest rates staying low for the foreseeable future, stock valuations well below historical norms, sentiment towards stocks at record lows and the alternatives to stocks looking somewhat over-valued (i.e. bonds, REITS), it still looks like a better time to be sticking with the companies that will continue to grow with the global economy.  Within our Balanced Funds we remain overweight stocks (about 20% above benchmark levels – slightly lower than the 25% level we were at in July) with a focus on Industrials, Basic Materials, Energy, Technology and Financials (particularly U.S. banks).  We remain near zero-weighted in defensive/yield stocks due to excessive valuations and are also well underweight government bonds in favour of corporate issues. Let October roll in!

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