At the end of 2012, the financial markets experienced a very dramatic event: The Fiscal Cliff. Dramatic might be too strong of a word, but it seemed that way because we didn’t stop hearing about it in the media. It was even the lead story on the national evening news every night for a week.

Many investors and big hedge funds I spoke to were so frightened by the uncertainty around this event that they came into 2013 VERY lightly invested. Many were aggressively hedged in case the market crashed. Early in the morning on January 1, 2013, the US House and Senate passed a bill that prevented the country from going over the fiscal cliff and the stock market gapped up +2.6% on January 2nd. It never looked back that year.

Here’s the interesting part. The market kept grinding up in the first quarter of 2013, but many fund managers stayed lightly invested. They figured the market would eventually come down and they could get invested later in the year. Unfortunately for them, it kept going up all year and finished around +30% in 2013. The biggest drawdown during the year was -6% and many managers never had the chance to get completely involved.

Fast forward to today. At the end of 2016, many people I spoke to were very cautious coming into this year. It wasn’t because of one specific event; it was mainly due to the uncertainty around the new President and his policies. For example, there was much speculation that a decline would come early in the year, as any selling would be delayed into 2017 because of a potentially lower tax rate. Instead, the market once again fooled the majority and gapped up +1%. I know it’s early, but so far it hasn’t looked back. In addition, many people (including myself) felt the Inauguration would be a “sell the news” event until we got a clearer picture of the new Administration’s policies. Again, the market proved many wrong.

Going forward, I know several managers who remain lightly invested and are waiting for a pullback. What’s amazing is that two sentiment surveys this week are showing high bearish readings when we’re only -1.5% off the highs. For example, AAII Bears are up to 46.5%, the most since the 2016 February lows, and NAAIM is at its lowest reading of the year so far. I am by no means saying the market will grind straight up this year as it did in 2013, but I do think many are underestimating the power of psychology in this recent market rally.

If you’re looking for more technical and fundamental similarities to 2013, I suggest reading this post at The Fat Pitch blog: The Similarities (and Key Differences) Between 2017 and 2013 So Far.

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