"Courage is resistance to fear, mastery of fear, not the absence of fear," Mark Twain once said. For investors, Twain's words seem particularly timely right now, given the transitioning state of unease that has been gripping the stock market for the first full week of the post-QE3 era. In fact, if you talk to veteran strategist Don Hays, of Hays Advisory in Nashville, he'll say that what we need right now is a little more fear and the conditions would be absolutely perfect.
"We've looked at the last 50 years, and when you have conditions very similar to today — with monetary policy extremely positive, valuations extremely positive, and psychology a little queasy here — you still have very high odds that in the next 12 months you're going to make money," Hays says in the attached video.
In fact, 50 years of analyzing these three variables has shown that when they do all line up, there's an 84% chance that stocks will be higher in the next 12 months by an average of 26%.
If he's right, by this time next year the S&P 500 would be on its way to topping 1900, firmly in record territory. It's why, in a recent note to clients, Hays described himself as being "long-term very bullish, but short-term hanging in there." While he's not predicting a washout in stock on the level of what we saw in 2010 and 20111, he does think the next few months will be tough and could see as much as a 10% decline.
"Psychology is just a little queasy. It's not terrible; it's not to that killer stage yet, but it probably says for the next two months the markets will be status quo, at best, with maybe just a bit of weakness going into the election," he says.
Clearly this is not Hayes' rookie season on Wall Street, and this former NASA engineer delights in remembering all the instances over his long career where fear won the battle for investors' heart and minds. In fact, wrapped in his mantra of "reading tomorrow's headlines today," Hayes is much more comfortable relying on the predictive track record of his asset allocation model rather than the public musing of the industry's so-called super pundits. Instead, he recommends investors "pay attention to the psychology, monetary, and equity valuation measures."
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