Investors are in a historically rotten mood. Their three biggest fears are exaggerated, the strategist says.

The American Association of Individual Investors has been tracking retail sentiment since 1987 and this week wow has that mood been rotten. The spread between bullish and bearish sentiment fell to -17%, from a positive 12% just a week earlier. That’s the lowest number since October 2020 and the biggest one-week drop since August 2019.

The good news is that a rapid decline in investor pessimism is usually unfounded. Buying last October, ahead of the US election, would have delivered a cool 33% gain in the S&P 500 SPX,
-0.16%.
By buying the August 2019 blues, an investor would have been up 17% a year later.

In a note to clients, Truist Advisory Services chief strategist Keith Lerner addresses three of the biggest concerns investors have — and why he’s optimistic anyway.

The first is the idea that peak economic growth is being reached. Lerner says the evidence supports the idea that the coronavirus delta strain delayed rather than stunted growth. “We now expect about 6.2% economic growth in the US for this year and a healthy pace of 4.5% next year, which is still about double the pre-pandemic trend,” he says. The Citi US Economic Surprise Index has fallen so much that it is now at a point where it tends to rise again.

The next problem is the likely phasing out of bond purchases by the Federal Reserve. Lerner notes that it is well telegraphed that the Fed will at least still buy bonds next year and that the economy is in a much stronger position than it was during the 2013 winding down.

The third point is the tax hikes for corporations and investors being considered by Congress. Lerner says the consensus is that the corporate tax rate will be increased from 21% to 25%, and the capital gains tax rate will be increased from 20% to 25% for those earning more than $400,000.

Lerner says that when examining the historical impact of tax policies on market returns and economic growth, there is no consistent correlation. For example, the high taxes of the 1950s saw the best stock market returns of the past 70 years, as well as a robust economic environment; the low-tax 2000s saw the bursting of the technology bubble and the global financial crisis.

“We’re not suggesting that taxes don’t matter. Instead, our works show that taxes are just one of many factors that affect market returns. Moreover, the business cycle tends to overwhelm tax policy,” he says, estimating that corporate profits will be squeezed by 5% due to tax proposals.

What does look attractive, he says, is the relative valuation. The equity risk premium, a measure that compares the valuation of stocks to bonds, remains at a level historically consistent with stocks outperforming bonds on a 12-month basis, he says.

The graph

AN study finds narcissistic chief executives drive less, but bigger, mergers and acquisitions. But how do you recognize narcissism? By studying conference calls and using personal pronouns. “The higher this ratio of first-person pronouns to all personal pronouns, the more likely it is that a CEO will try to make stupid, excessive takeovers that will lead to lower shareholder value,” said Liberum strategist Joachim Klement. Capital who also maintains his own blog.

the buzz

Invesco IVZ,
-2.58%
is in talks to merge with State Street’s STT,
-0.99%
wealth management company, in a deal that if reached, would create a clear number three player behind BlackRock BLK,
-2.11%
and Vanguard in the exchange-traded funds, according to The Wall Street Journal.

A Food and Drug Administration advisory committee is meeting on whether vaccine booster shots for the coronavirus — and Pfizer’s PFE in particular — should be taken.
-0.67%
and BioNTech BNTX,
+4.90%
– must be administered.

American Steel X,
-1.09%
said its operating profit would improve sequentially from $1.3 billion to $2 billion, as the ratio of net debt to adjusted EBITDA is expected to be about 0.6-fold by the end of the quarter.

The People’s Bank of China has injected about $14 billion in short-term funds into the banking system as concerns mount over China Evergrande’s 3333,
-3.42%
ability to repay his huge debt.

The market

Prior to the expiration of four major contracts, US stock futures ES00,
-0.24%

NQ00,
-0.21%
impaired. The return on the 10-year Treasury TMUBMUSD10Y,
1,347%
amounted to 1.34%.

Random reads

The will of Prince Philip remains a secret for 90 years.

Two ethics complaints have been sent Rep. Alexandria Ocasio-Cortez accepts free tickets for the Met Gala, where she wore a “tax the rich” dress.

A message in a bottle was discovered in Hawaii — after being sent to Japan 37 years ago.

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