This article written by Alan first appeared on the 21st of February 2009, less than two weeks before the new bull market he predicted, began on the 9th of March.  His contrarian stance proved correct.

What were you doing at the time and what were you being advised?

Alan Steel, Chairman


“There are plenty of reasons to be cheerful.”

While the financial news may seem unremittingly bleak, medium to long term investors should remember that the experts who predict gloom today did not see the current crisis coming – and may not see the recovery either. 

The other day I was in the Opticians for my annual check up and in walked a former next door neighbour, a builder who retired a few years ago.  He wondered if I had retired too and was surprised I was still hard at work.  He wondered why.  I explained I wanted to see out the stockmarket recovery which would see my investments grow significantly over the next three years and he said it wasn’t just my eyes that needed testing.  According to him everybody knows we won’t see a recovery of economies or stockmarkets in our lifetimes!

Obviously he believes the experts who pump out the bad news that surround us right now.  These are the same experts who last summer advised us property was a key investment for our retirement savings.  They’re the same ones who confidently told us the US Dollar would plummet.  And who predicted gold when it was at £1,000 an ounce would double over the next 12 months.

As oil hit over $145 a barrel the same experts predicted it was heading to $200 and higher with continuing price rises in hard and soft commodities.  And every prediction ended up wide of the mark.

History tells us that when experts and headlines are aligned it’s time for a sharp exit.  It tells us to be afraid when things look too good and to be optimistic when things look too bad.

So given all the bad news it’s time to look for reasons to be cheerful, and there’s plenty.  Successful investors buy when markets are oversold, and sell when they are overbought.  They like fair value.  Right now estimates both here and in the US suggest stockmarkets to be 42% too cheap.  Corporate insiders, who don’t make many mistakes, are currently net buyers of their shares.

Private investor sentiment too is rarely wrong.  Or should I say rarely right.  You can measure this mathematically.  Ned Davis Research show in the US when private investors are at extremes of optimism or pessimism it’s a perfect contrarian indicator for long term investors.  In other words when they are overly pessimistic it’s a good time to buy, and vice versa.

Experts tell us we’re heading for the Great Depression of the ‘30s again.  Even President Obama agrees.  He said “By now it’s clear to everyone we’ve inherited an economic crisis as deep and dire as any since the days of the Great Depression”.  I’m afraid the numbers don’t actually add up.

In 1930 real US GDP fell 9%, the next year it fell 6.5%, and in 1932 it fell 13%.  But in 2007 real US GDP rose 2%, and last year it rose 1.5%.  The consensus view of 2009 real GDP is a fall of 0.3%.

Right now monetary policy is loose, interest rates have been slammed down to almost zero, and job losses and mortgage foreclosures are far less than they were in the Great Depression.

Always check the numbers.  I read that according to experts, unemployment in the US shows the worst job losses since December 1974 at 600,000.  But what they don’t tell you is the US labour force today is 65% higher than it was in December ’74.

They tell us advertising revenues are dropping.  That’s funny – because when you look at the on-line ad revenues in the US they’re up 8% year on year with strong performance in the 4th quarter of last year.  That doesn’t quite go along with the Depression theory.

Levels of cash on the sidelines from experienced investors are also important.  A US survey shows in January experienced investors had 42% in deposit, a record level since records began in the 1980s.  Incidentally the last two occasions when deposits were almost as high, 38% in ’91, and 39% in 2002, were the previous 2 best occasions to have bought equities since late 1987.

Finally, studying US stockmarkets, after Presidential Inauguration days, going back all the way to 1900 is also encouraging.  The average gain in the stockmarket following an incoming Democrat President, replacing an out-going Republican, is 13% 126 days later.  And typically the first month after inauguration shows weakness.

So there’s plenty reasons to be cheerful.  Those prepared to take at least a 2-3 year view, hoping to have decent income and capital gains, could do a lot worse than tuck away a selection of good quality UK Equity and International Income Funds.

Courtesy of The Telegraph, 21 February 2009

Alan Steel
Alan Steel is chairman of Alan Steel Asset Management
Alan Steel Asset Management is regulated by the Financial Conduct Authority.

This article contains the personal views of Alan Steel and should not be construed as advice. Do check your individual circumstances with your advisers.