Stocks on the Rocks? Maybe Not.
Contrarian indicators suggest the market may advance despite the banking crisis.
Commentary
Will tight bank lending standards hurt stocks?
At the end of the first quarter, banks’ willingness to lend was in the bottom decile of
its range since the 1960s, a level consistent with past recessions (Exhibit 1). Investors
may generally view this as bad news for the economy and, as an extension, stocks.
Stocks on the Rocks? Maybe Not.
Contrarian indicators suggest the market may advance
despite the banking crisis.
Denise Chisholm
Director of Quantitative
Market Strategy
I approach my research by looking at market data through a historian’s
lens. I believe historical patterns, when considered in the appropriate
context, can help investors build conviction about future trends. This
month, I’m focusing on the potential for the market to advance despite
poor investor sentiment and concerns about the banking crisis.
EXHIBI
T 1: Banks are reluctant to lend.
Federal Reserve Senior Lending Officer Survey Bank Willingness to Lend to Consumers and
Recessions, 1966–Present
Bank willingness to lend to consumers based on the Federal Reserve Senior Loan Officer Opinion Survey on Bank
Lending Practices. This quarterly survey tracks the net percentage of U.S. respondents’ willingness to make consumer
loans. Gray bars indicate recessions, as defined by the National Bureau of Economic Research Business Cycle Dating
Committee. All data gathered and analyzed quarterly from 1966 to March 2023. Sources: Haver Analytics and Fidelity
Investments, as of 3/31/23.
–10 0
–80
–60
–40
–20
0
20
40
60
80
Jun-66
Jun-71
Jun-76
Jun-81
Jun-86
Jun-91
Jun-96
Jun-01
Jun-06
J u n -11
Jun -16
Jun-21
Net % Willing to Lend
Stocks on the Rocks? Maybe Not.
|
2
EXHIBIT 2:
Stocks after bottom-decile willingness to lend.
Historical Odds of NTM Market Advance in LTM Performance
Tranches, 1966–Present, ex-GFC
Past performance is no guarantee of future results.
NTM: Next twelve
months. LTM: Last twelve months. Ex-GFC: Excluding the Global Financial
Crisis. Analysis based on Fidelity top 3,000 stocks by market capitalization.
Bank willingness to lend based on the Federal Reserve Senior Loan Officer
Survey. All data gathered and analyzed quarterly from 1966 to March 2023.
Sources: Haver Analytics and Fidelity Investments, as of 3/31/23.
Yet my research shows that tighter lending standards
have been part of a contrarian buy signal for the stock
market in the past. I looked back to 1966, excluding
the Global Financial Crisis of 2007–2009, and found
that when the market fell for the 12 months before
lending willingness reached the bottom decile, stocks
generally advanced over the next 12 months (Exhibit 2).
Notably, the willingness of bank lending was in its
bottom decile as of March 31.
High net shorting has been a contrarian
bull signal
Investor sentiment was poor by several measures
as of early April. For example, net non-commercial
short sales (the highest net-shorting quartile) stood at
the most bearish 25% of their range since 2010. This
negativity might be a positive for future returns as well.
In the past, the more net shorting of stocks, the better
the market’s returns over the next six months, on
average. (Exhibit 3.)
EXHIBIT 3:
More net short sales corresponded with
stronger stock returns.
Next-Six-Month Average Returns in Quartiles of S&P 500®
Net Positioning, 2010–2023
Past performance is no guarantee of future results.
Analysis based on the
S&P 500. All data gathered and analyzed monthly from 2010 to April 2023.
Net short sales based on non-commercial traders tracked by the Commodity
Futures Trading Commission Commitment of Traders Report. Sources: Haver
Analytics and Fidelity Investments, as of 4/7/23.
40%
50%
60%
70%
80%
90%
100%
100%
86%
88%
74%
66%
<–10%
LTM Performance Before Bottom-Decile Willingness to Lend
Historical Odds of Market Advance (NTM)
<–5%
<0%
>5%
>10 %
0%
2%
4%
6%
8%
10%
Most
Net Short
Quartile
7. 6%
Q2
5.9%
Q3
5.5%
Most
Net Long
Quartile
3.3%
Stocks on the Rocks? Maybe Not.
|
3
In the past, a long dearth of bulls has been
a good sign for stocks
The percentage of investors who are bullish has stayed
within the bottom quartile of its historical range for 65
straight weeks—the longest such stretch on record.
Historically, the longer a dearth of bullish sentiment,
the higher the odds of a market advance over the next
year. After the percentage of bulls reached the bottom
25% of its historical range for top-quartile lengths of
time, the market advanced over the next 12 months
95% of the time (Exhibit 4).
Based partly on this analysis, I have a positive outlook
for the stock market over the coming year.
EXHIBIT 4:
After a long lack of bulls, the market has
usually advanced.
Historical Odds of a NTM Market Advance by Number of
Consecutive Weeks of Bottom-Quartile Bullish Sentiment
Past performance is no guarantee of future results.
NTM: Next twelve
months.
Analysis based on the S&P 500. Percentage of investors who are
bullish based on the American Association of Individual Investors Sentiment
Survey. All data gathered monthly, 1993–2023. Sources: Haver Analytics
and Fidelity Investments, as of 4/7/23.
40%
50%
60%
70%
80%
90%
100%
None
Shortest
Quartile
Q2
Q3
Longest
Quartile
76%
87%
87%
85%
95%
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Author
Denise Chisholm
Director of Quantitative Market Strategy
Denise Chisholm is a market strategist in the
Quantitative Research and Investments (QRI)
division at Fidelity Investments. In this role, she
is focused on historical analysis, its application
in diversified portfolio strategies, and ways
to combine investment building blocks, such
as factors, sectors, and themes. In addition to
her research responsibilities, Ms. Chisholm is
a popular contributor at various Fidelity client
forums, is a LinkedIn 2020 Top Voice, and
frequently appears in the media.
Prior to assuming her current responsibilities in
September 2020, Ms. Chisholm held multiple
roles within Fidelity, including sector strategist,
research analyst on the Megacap Research team,
research analyst on the International team, and
sector specialist.
Fidelity Thought Leadership Vice President Mike
Tarsala provided editorial direction for this article.
1.9910010.100
0523
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