Buy Stocks Because This Bull Market Has Legs, Says UBS

Elevated investor pessimism suggests stocks will deliver above-average returns.

(Michael Nagle/Bloomberg)

(Michael Nagle/Bloomberg)

The Standard & Poor’s 500 reached a record high today and is up more than 50% since its March low despite the rampant unemployment and widespread economic destruction caused by the Covid-19 pandemic.

The apparent disconnect between Wall Street’s gains and Main Street’s pain helps explain elevated investor pessimism (despite a day-trading boom and extreme bullishness among short-term market timers).

Just 23% of U.S. investors recently surveyed by the American Association of Individual Investors (AAII) expect the S&P 500 to rise in the next six months. This number is “lower than 94% of all readings since the survey began in 1987,” according to UBS.

When AAII’s bullish sentiment falls below 25% it typically augurs well for equities. Historically, when this has happened stocks have delivered above-average returns for the next three, six, and nine months, as well as full year, according to research by UBS and Bloomberg.



Moreover, UBS expects that the rally will broaden beyond U.S. large-cap stocks to include smaller U.S. names and international markets.

“We are in the early stages of a bull market, and as confidence continues to grow we believe that we will see outperformance in stocks that have lagged so far in this recovery, such as U.S. mid-cap stocks and U.K. equities, both of which are among our most preferred asset classes,” write Solita Marcell, Head of CIO Americas, and Justin Waring, Investment Strategist Americas, of UBS Financial Services.

Investor skepticism is also reflected in the types of investments faring best, UBS argues, noting that “the largest and least economically sensitive stocks,” along with safe haven assets, are leading the bull market.

Tech titans, including Apple, Microsoft, and Amazon, have turbocharged the S&P 500’s returns and gold has been surging, recently trading above $2,000 per ounce.

“This adds to the evidence that markets are still skeptical about the durability of the economic recovery,” note Marcell and Waring.

Amid ultra-low interest rates, the macro environment is supportive of equities, UBS asserts.

“We believe central banks will remain in stimulus mode for the foreseeable future, supporting risk assets but creating both opportunities and challenges for investors,” according to UBS Global Wealth Management’s Chief Investment Officer Mark Haefele.

Haefele sees upside for companies involved in 5G and other enabling technologies and expects that cheaper sectors, which have lagged, including cyclical and value stocks, will lead the market during its next leg higher.

Global fund managers also think that the “bear market rally” is now a legit bull market.

According to Bank of America’s latest monthly investor survey, which tallied results this month from more than 200 investors managing a combined $518 billion, fund managers are more bullish than any time since February.