The Investment Pros Haven't Been This Scared Since 9/11

Everyone wants to bag on the little guy...

They'll call mom-and-pop investors the "dumb money." They'll insist these folks don't know what they're doing – that they chase trends at the worst possible times.

That's not entirely wrong. Mom-and-pop investors will often put money into hot ideas after the biggest gains have already been made... and pull money out after the worst of the losses are over. That's human nature.

But calling these folks the "dumb money" is being a bit too charitable toward the investment pros.

You see, the pros have a history of doing the exact same thing...

It's happening again right now. Investment pros have been raising cash. And those cash stores just hit a level we haven't seen since 2001 – right after the 9/11 attacks.

Importantly, this is a contrarian signal. When the pros raise cash to a huge degree, they're fleeing the markets... And it usually means a stock rally is on the way.

Let me explain...

Tracking investor sentiment is always important. But in times like these, when the world seems to get crazier each day, it's absolutely crucial.

One of the best ways to learn what the investment professionals are thinking is through the Bank of America Merrill Lynch Global Fund Manager Survey. This monthly survey asks a few hundred fund managers how they feel about the markets... and what they're doing with their money.

Again, you'd expect these folks to get it right. They're supposed to be the "smart money." But in reality, the pros tend to crowd together in extreme times, just like mom-and-pop investors.

We saw that in the May survey. Specifically, fund managers are now holding more cash than they have in decades. It's more than they held at the COVID-19 bottom... or during the global financial crisis. Take a look...

Cash levels are the highest they've been since just after the terrorist attacks of September 11, 2001. This tells us that the investment pros are scared.

They don't want to own stocks. They want the safety and security of cash.

You shouldn't follow their lead, though... When the pros all feel this way, it's usually a good time to buy.

You can see on the chart above that cash levels tend to peak in bad times and then reverse. We can't know for sure if we're at peak levels today. But we're at a multidecade high. And if this is the peak, we can expect good things from here.

The table below shows the forward returns for each of the cash-level peaks highlighted above...

Stocks have staged an epic rally from their 2009 bottom... But the decade before that was brutal. As a result, over the full period from our chart above, the S&P 500 Index returned just 5% per year with a buy-and-hold strategy.

However, you can do better than that by doing the opposite of the investment pros...

Buying when cash levels peaked led to 5% gains in three months and 10% gains over the next year. That's double the typical buy-and-hold performance.

More important, setups like these tend to be great long-term buying opportunities. These setups resulted in five-year gains of 48% versus a typical return of 28% over the same period.

There are a couple of caveats here... First, we don't have many examples to look at over history – these situations are rare. Second, we don't know if we've hit the peak in cash yet this time around.

But either way, we know the investment pros are scared. And that's how bottoms form.

I don't recommend you dive back in until a clear uptrend begins. But history shows today's negativity is a good sign for future returns... And a major buying opportunity is coming.

Good investing,

Brett Eversole

Further Reading

"Investor sentiment is pricing in a lot of bad news," C. Scott Garliss writes. With uncertainty filling up the market right now, the "smart money" is running for the exits. But history shows today's volatility could lead to massive returns once the trend turns back in our favor... Learn more here: Stocks Are Becoming a Contrarian's Dream.

"They've been wrong plenty of times before," Chris Igou writes. The "experts" on Wall Street are fleeing the market en masse. But you could miss out on huge gains if you blindly follow their lead. Make sure you're not making this mistake... Learn more here.