Investing

Climbing the Wall of Worry

Clearly, we’ve had a tremendous run in stocks but it hasn’t been without a chorus of very intelligent naysayers who have made many astute observations and convincing arguments. However, their predictions and their timing have been wrong. I don’t mean to be critical because many valid points have been made. But the trend and rising tide have been stronger and more persistent than so many expected.

So while valuations are elevated and there are a list of worries that could break the market’s uptrend, we haven’t observed the typical euphoria that occurs at market tops. As a matter of fact, I came across the chart below last week showing equity fund and ETF flows. For those that may not know what flows are, they represent the net cash going into or coming out of mutual funds and exchange-traded funds. At the end of 2019, the flows entered uncharted waters as the outflows were the lowest they’ve been this century. What that means isn’t entirely clear, but it’s hard to believe that the market will crash from here unless the masses have correctly timed the market’s turning point. Highly unlikely.

Ciovacco Capital Management put together the table below to show S&P 500 performance following these extreme outflow levels over the past 20 years. Remarkably returns in all cited instances were positive one, two, three, four and five years after the extreme outflow level had been reached.

I don’t know what any of this means for future returns, but it certainly is a positive data point in a world full of worries and makes a strong case to stay invested.