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Fed Data Hints Americans Still Too Bullish For Stock Market Crash To End


  • Survey data from N.Y. Federal Reserve suggests the stock market crash may not be over.
  • Retail investors are still bullish prices will be higher in 2021 than in the present day.
  • Small traders are historically on the wrong end of big moves in the Dow Jones or S&P 500.

If bear markets end when investors reach maximum despair, this year’s stock market crash may have further to run. Data released by the New York Federal Reserve indicates that American’s are now more bullish that equity prices will be higher in 2021 than they were before the pandemic.

Can the Dow Jones have bottomed if bearish sentiment has not yet peaked? Probably not.

Investors More Bullish After Historic Stock Market Crash

After the coronavirus inspired a virtual shutdown of the global economy, asset prices around the world plunged. In the U.S., this prompted a historic stock market crash, which moved faster than anything we have ever seen in the Dow.

The Dow Jones endured the fastest stock market crash in history this year. | Source: Yahoo Finance

As unemployment has skyrocketed, initial jobless claims have risen to historic levels as over six million Americans filed claims last week. The fundamental pillar of the United States service-based economy has eroded, not to mention a significant collapse in the price of oil (of which the U.S. is the world’s largest producer).

There are also massive underlying issues in the mortgage market. Lenders are apparently on the brink of collapse as they’ve been forced to defer a historic amount of missed payments.

Fed Survey Perfectly Timed The Bounce In The Dow

Despite all this, N.Y. Fed consumer survey data demonstrates that Americans believe the stock market will be higher in a year at a rate higher than they did in February.

The survey shows that peak bullishness was achieved right at the Dow Jones’ low between March 17-23.

Retail investors were most confident the stock market would be higher in one year (53.9%) at precisely the YTD low in the Dow. | Source: N.Y. Federal Reserve

A sound-bite from JPMorgan Chase confirmed this sentiment. They note that the bank has seen retail investors inflows picking up again as conventional behavior returns to markets, stating,

“After 4 wks of “heavy and indiscriminate selling,” retail investors bought equity mutual funds for the 1st time since the beginning of Feb. .. $1.5tr of dollar cash is likely to gradually re-enter bond and equity markets as retail investors “normalize their behaviour.”

Ordinarily, you might think this is a good sign, but typically retail does not time the market well.

Small investors are usually at peak bearishness when bull markets start and peak euphoria at market tops.

Source: Twitter

All the conditions are now in place for a classic bull-trap. Funds have used this period of calm to reallocate their risk exposure, leaving small traders diving into the Dow exposed to a significant snap-back.

If It Smells Like FOMO, It Probably Is

It isn’t hard to see why American’s might be getting bullish. New York is showing some promising signs in its fight with coronavirus, and many stocks and sectors look desperately cheap.

There hasn’t been a bear market in the U.S. for more than a decade, and people are attuned to the concept that stocks usually go up. Especially when the Fed is printing money as fast as it can type zeros into “the computer.”

Source: Twitter

Unfortunately, the same history that tells us the Dow Jones will be higher in the future, also tells us that if the retail demographic believes something, it probably won’t happen.

The stock market crash may have further to run until the Fed’s survey shows a complete capitulation in sentiment, and there is so far no evidence of this.

The opinions expressed in this article do not necessarily reflect the views of CCN.com. The above should not be considered trading advice from CCN.com.

This article was edited by Aaron Weaver.





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