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Contrarian investors like to say the best time to buy stocks is when nobody else wants them.

If so, the pervasive gloom that hangs over global stock markets could be signalling a rare buying opportunity.

The most recent monthly survey of money managers by Bank of America shows that optimism among professionals regarding global economic growth has sunk to its lowest level since the survey began in the early 1990s.

Meanwhile, a recent survey of small shareholders conducted by the American Association of Individual Investors, or AAII, indicates the mom-and-pop crowd in the United States is feeling more pessimistic than at any time since 2009.

So is now the time to take advantage of this negativity and load up on stocks? Not so fast.

The notion that you should buy when everyone is fearful is one of those time-honoured market clichés that deserves to be treated with caution.

It can work out splendidly when pessimism drives investors to dump their stocks and pushes share prices to irrationally cheap prices. Stocks are then capable of staging massive rebounds on any hint of better times to come.

It is not so clear, however, that contrarianism produces great results on occasions – like now – when pessimism is running high, but stocks remain pricey and no bear-market sell-off has yet occurred.

To illustrate the problems with simple contrarianism, consider someone who based their investing strategy between 2018 and 2020 on nothing more than doing the opposite of whatever the Bank of America survey indicated professional investors were doing.

The survey showed that pessimism about the global growth outlook was rampant in 2018, when U.S.-China trade tensions were running high and the Federal Reserve was hiking interest rates to cool off the economy.

However, the prevailing gloom did not mean stocks were poised to roar ahead, as contrarians might have predicted. Instead, the S&P 500 index lost ground over 2018.

It wasn’t until 2019 that stocks staged a rebound. Fund manager sentiment gyrated throughout the year, in line with the latest communications from the Fed. Early in the year, many managers still feared a recession ahead. A few months later, following a couple of interest rate cuts by the Fed, managers had turned into exuberant optimists.

Share prices surged, but the bullishness came to an abrupt halt in early 2020, because of a disaster no one had foreseen – the arrival of a global pandemic.

Looking back, it is difficult to discern any big advantage to betting against the professionals’ opinion (or with it, for that matter). Sometimes the pros called things right, sometimes they didn’t.

Are individual investors a more reliable negative indicator? The AAII sentiment survey of April 28 shows 59.4 per cent of small market players expect stock prices to fall over the next six months.

This is remarkably high. In fact, it is the 10th highest level of bearishness since the weekly AAII survey began in 1987. It is also the highest level of pessimism since the post-financial-crisis lows of March, 2009 – which was a great time to buy stocks.

It is possible that today will also turn out to be a grand buying opportunity. Contrarians argue markets typically rebound after sentiment hits extreme levels of bearishness because even a tiny bit of good news is sufficient to incite a stampede of buying.

History suggests there is something to this theory. According to the AAII, at times when as many survey respondents are as bearish as they are now, the stock market has typically rocketed higher over the succeeding year, gaining an average of 23.7 per cent.

That record deserves respect. However, it is also worth remembering every situation is different.

The last time bearishness was running this high, in March, 2009, a brutal economy had already mauled stocks. The S&P 500 had lost half its value. Interest rates were hugging zero, with absolutely no sign of any tightening on the horizon.

None of that applies today. Stocks have lost a little ground in recent months, but continue to carry valuations well above historical norms. Meanwhile, interest rates are heading higher.

Anyone who wants to make a contrarian bet in this environment is embracing a lot of risk. Sure, it is possible that a flurry of unexpected good news – a peace deal in Ukraine or a rapid fall in inflation – could spark a major rally. But, for now, that seems more like a hope than a strategy.

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