9 out of 10 Investors Expect A Stock Market Crash In The Next 6 Months
Audio Brief
Show transcript
This episode covers the market's swift reaction to vaccine news, the drivers behind the post-election rally, and the paradox of investor crash confidence.
There are four key takeaways from this discussion. First, sometimes the most obvious market reaction to major news is the correct one. Second, strong corporate earnings often drive market strength more fundamentally than political events. Third, factor rotations between growth and value can be historically violent and swift. Finally, widespread fear of a market crash, especially after a recent one, can coincide with periods of market strength.
Following positive COVID-19 vaccine news, the market saw a massive, immediate sell-off in stay-at-home stocks and a rotation into reopening plays. This direct, first-level thinking proved to be the correct trade, countering beliefs that such news was already priced in.
The surprising post-election rally was initially linked to reduced political uncertainty. However, strong Q3 corporate earnings proved to be a more fundamental and powerful driver, supporting overall market strength despite ongoing volatility.
The vaccine news triggered a historic one-day factor rotation from growth and momentum stocks into value and reopening beneficiaries. This swift shift, where value outperformed growth by a spread usually seen over an entire year, demonstrated how quickly investor positioning can change.
Despite record market highs, a survey revealed nearly 90% of investors anticipate a catastrophic crash. This pervasive fear, potentially a product of recency bias from the earlier market downturn, often contradicts actual investor positioning and market performance.
This analysis highlights the dynamic interplay of news, earnings, sentiment, and investor behavior in shaping market movements.
Episode Overview
- The hosts analyze the market's powerful and predictable reaction to positive COVID-19 vaccine news, which triggered a massive sell-off in "stay-at-home" stocks.
- They discuss the underlying reasons for the surprising post-election stock market rally, attributing it to the removal of uncertainty and strong corporate earnings.
- The conversation delves into the historic one-day factor rotation from growth and momentum stocks into value and reopening plays.
- The hosts explore a "Crash Confidence Index" which reveals that despite market highs, a vast majority of investors still fear a catastrophic crash.
Key Concepts
- First-Level Thinking Wins: The hosts discuss how the immediate, obvious market reaction to the vaccine news (selling stay-at-home stocks, buying reopening stocks) was the correct trade, bucking the "second-level thinking" that it was already priced in.
- The "Stay-at-Home" Unwind: The rotation was not just out of tech; it included a wide range of pandemic beneficiaries like Clorox and home builders, which were sold off sharply as investors repositioned for a post-COVID economy, using these winners as a "source of funds."
- Election Relief & Earnings Strength: The market's strong performance post-election is attributed to the removal of uncertainty and the perceived "best of both worlds" scenario: retaining low tax rates while removing political volatility. However, the hosts argue that the surprisingly strong Q3 earnings season is a more fundamental driver for the market's strength.
- Crash Confidence vs. Positioning: Despite record market highs, a survey shows nearly 90% of investors expect a catastrophic crash. The hosts contrast this fearful sentiment with actual investor positioning, suggesting it is a classic example of recency bias following the March crash.
Quotes
- At 01:14 - "This is another situation this year where like first-level thinking is all you really need." - Josh Brown explains that the most obvious market reaction to the vaccine news was the correct one.
- At 02:28 - "I think they got sold because the universe of things that are investable now gets bigger and they become a source of funds." - Josh Brown offers his theory that stay-at-home stocks were sold not because they are bad companies, but to raise cash to buy newly attractive reopening stocks.
- At 15:24 - "The cheapest decile of value outperformed the most expensive by 11.5% yesterday, a spread that normally occurs over the course of the year." - Michael Batnick highlights the historic and violent nature of the one-day factor rotation from growth to value following the vaccine news.
Takeaways
- Sometimes the most obvious trade is the right one; don't overthink major macro events.
- Corporate earnings are a powerful fundamental driver that can be overlooked during periods of high political or news-driven volatility.
- Factor rotations between styles like growth and value can be extremely violent, with a year's worth of performance difference sometimes occurring in a single day.
- Investor sentiment can be a contrary indicator; widespread fear of a crash, especially after one has already occurred, can coincide with periods of market strength.
