Be Very Greedy When Others Are Very Fearful

So far, not so good!

No doubt, with the S&P 500 piercing correction territory (10% decline from the highs) on Thursday, traders aren’t shaking things off as well as Scott Bessent. The U.S. Treasury Secretary said he was focused on the real economy, proclaiming on Thursday, “I’m not concerned about a little bit of volatility over three weeks.”

Certainly, uncertainty is running high, given worries about on-again-off again tariffs from the White House and our trading partners, rising concerns about an economic downturn and the ongoing purging of Federal government jobs

While stocks turned in a sizable bounce on Friday, it was a second straight brutal week for the equity markets since I parroted Warren Buffet’s advice to be greedy when others are fearful. Clearly, folks are still very nervous, as the latest weekly Sentiment Survey from the American Association of Individual Investors (AAII) showed only a 19.1% tally of those who said they were Bullish on stocks over the next six months, versus 59.2% who said they were Bearish.

AAII Major Intermediate Buy Signal Still Intact

The AAII Bull-Bear Spread residing at minus 40.1 continues to reflect a percentage of pessimists trouncing the optimists by a factor of 3, with recent readings some of the most Bearish in history, given that Main Street is usually Bullish. I do not want to downplay the fears, but it is fascinating that the AAII folks are more frightened today than they were during the COVID-19 Pandemic or in the aftermath of 9/11!

Happily, although the one-week forward return figures historically have been dismal, the 1-month, 3-month and 6-month stock performance numbers have been sensational, on average, when AAII members are down in the dumps. Not surprisingly, I retain my enthusiasm for the long-term prospects for stocks, and I have a little bit of an extra bounce in my step when a contrarian market gauge is flashing a major buy signal.

After all, I agree with Mr. Bessent who stated last week, “The reason stocks are a safe and great investment is because you’re looking over the long term. If you start looking at micro horizons, stocks become very risky. So, we are focused over the medium-, long-term.”

Fear Breeds Opportunity: Univ. of Michigan Buy Signal

Though stocks staged a big rally on Friday, the headlines in the financial press were busy warning of a big drop in consumer sentiment. The latest University of Michigan Sentiment survey saw a drop to 57.9 in the primary Sentiment gauge, continuing its downward trend from February’s reading of 64.7 and coming in well below expectations of 63.0.

While that doesn’t sound like good news, decades of market history show that extreme pessimism among consumers has coincided with compelling equity market returns going forward. Indeed, The Michigan Sentiment index has served as a strong contrarian signal for investors willing to lean into market fear.

To be sure, the signal is not foolproof in the short run as numbers in 2001 and 2011 will attest, but the figures in the table above should provide comfort…and dare I say, inspiration for students of market history. True, the latest drop in sentiment is being driven by inflation concerns, with year-ahead inflation expectations jumping from 4.3% to 4.9%, the highest since late 2022. Long-term inflation expectations also rose to 3.9%, levels not seen since 1993. However, history also shows that equities have been a great hedge against inflation.

Yes, the world is very uncertain today, but uncertainty never really goes away, even as it’s natural to feel uneasy when markets are rocky. As the founder of The Prudent Speculator, Al Frank, said during one particularly disconcerting period a couple decades ago, “They are having a sale in Wall Street, with recently increased discounts. Now is a good time to buy selected common stocks for long-term capital gains in a widely diversified portfolio.”

We will have volatility ahead, but I see no reason to alter my enthusiasm for the long-term prospects of undervalued stocks!

For those looking to hear more, straight from the horse’s mouth, check out my recent Webinar: 3 Market Myths Debunked and Q&A.

A replay of the event is available here:

3 Market Myths Webinar

And the slide deck is available here:

https://theprudentspeculator.com/wp-content/uploads/2025/03/TPS_webinar_deck_3MarketMyths.pdf

Disclosure: Please note that shares of the stocks mentioned are owned by asset management clients of Kovitz Investment Group Partners, LLC, a SEC registered investment adviser. For a list of stock recommendations like these made in The Prudent Speculator, visit theprudentspeculator.com.