When Fear Rises, Opportunity Whispers

• Active money managers’ pessimism is approaching Liberation Day levels.

• The NAAIM Exposure Index recently dropped from above 100 to near 70.

• Data indicate similar moves produced above average S&P 500 returns.

In the noise of a coming storm, the greatest opportunities have a tendency to arrive quietly…

Contrarian investing requires a certain temperament. It demands the ability to stay steady at the same time when everyone else is losing their footing. The moments that feel most uncomfortable are often the ones that matter most, because that’s where the biggest long‑term gains tend to hide.

You saw it during the COVID shock in 2020: economists warned of a downturn rivaling the Great Depression. They were unable to imagine a rapid medical response or the productivity boost technology would deliver. They missed the rebound entirely, both in the economy and in the market.

Today’s backdrop carries a similar emotional weight. The ever-evolving developments in the Middle East have stirred up a fresh round of worst‑case narratives. A return of rising gas prices has sparked fears of renewed inflation and more rate hikes. Risk assets have felt that pressure, and the tone around markets has grown noticeably more cautious.

Given the ever louder calls for disaster scenarios, I thought it was a good moment to check in on investment‑manager pessimism. And what I found was telling: institutional investors are not positioned for a constructive outcome to the events in the Persian Gulf. Exposure levels have pulled back sharply, leaving managers under‑allocated if tensions ease. That means the S&P 500 Index could be poised for a sharp rally if the U.S. and Iran can finally reach an agreement.

But don’t take my word for it, let’s look at what the data’s telling us…

One of the easiest ways to see how professional investors are positioned is through the National Association of Active Investment Managers (“NAAIM”) Exposure Index. It captures where money managers are sitting in U.S. equities. Institutions can be anywhere from fully short (-200%) to fully leveraged long (+200%). The gauge distills it into a single number.

Because it reflects real allocations rather than opinions, it gives a direct read on how much risk money managers are willing to carry at any moment. Rising exposure means they’re leaning in. Falling exposure means they’re stepping back, hedging, or simply waiting for the dust to settle.

The index becomes especially revealing at the extremes. When exposure surges, managers are already fully committed to the trend, leaving little dry powder if conditions wobble. When exposure collapses, fear is usually well‑priced and sellers are largely spent. It’s not a timing tool, but it reliably shows when positioning has swung too far, and the rubber band is stretched.

Late last year, that rubber band was stretched tight. The NAAIM Index logged multiple readings north of 100 in November and December. That was a sign that active managers had pushed into leveraged‑long territory. But that posture hasn’t held…

Last week’s reading fell to nearly 70 for the first time since March (it’s up 12.9% since). That was a meaningful shift from “all‑in” to “dial it back.” It also meant the index is now close to the long‑term average of 67…

So, I wanted to go back and look at prior episodes where we’ve seen a similar drop. Historically, the gauge has fallen below its long‑term average roughly a quarter of the time. As the chart above shows, those moments tend to cluster around stress points: the COVID shock in 2020, the Fed’s tightening cycle in 2022, and Liberation Day in 2025.

From there, I pulled the S&P 500’s forward returns following similar pullbacks to the one we’re experiencing currently. I looked at both price returns and total returns (dividends reinvested). What I found was that across the board, the index tended to deliver above‑average gains.

Here are the price basis numbers…

One year out, the S&P 500 has averaged a 10.1% gain versus its long‑term annualized 7.2% since 1928 — with a 78% success rate. The results are even better over the following two years, with a 23.6% gain and an 82.3% success rate.

But the total return numbers are even better…

The 12‑month total‑return numbers stand out with a 12.1% average gain and an 80.5% success rate. The 24-month results are even better with a 28.4% average increase and a 84.7% success rate. Bothe results are well ahead of the S&P 500’s long‑term 9.7% annualized total return.

The toughest stretches for investors tend to be when the narrative turns dark, and the loudest voices insist the sky is falling. That’s also when the NAAIM Exposure Index shows active managers at their most defensive. They pull back just as fear peaks. Yet historically, those resets have marked the moments when future returns quietly improve. These are the environments where easing back into the market has paid off. There’s no reason to assume this setup will behave any differently.

Five Stories Moving the Market:

U.S. President Donald Trump said he would ⁠be open to meeting with Iran's President Masoud Pezeshkian, who is expected in New York this week for the United Nations General Assembly – Reuters. (Why you should care – Iran is still calling for the U.S. to return to the June memorandum of understanding terms)

Oil and liquefied natural gas shipments through the Strait of Hormuz in the past two weeks reached the highest level in six months, signaling that U.S. naval protection and mine clearance efforts are “paying off,” according to the head of U.S. central command, Admiral Brad Cooper – Bloomberg. (Why you should care – increased flow of energy products through the Strait of Hormuz would help to bring down global prices and inflation growth)

Yemen’s Houthi rebels claimed an attack on Saudi Arabia’s capital that apparently targeted jet-fuel storage at its airport, marking the first direct assault on Riyadh in months as the group squeezes the kingdom’s Red Sea route for its oil exports – WSJ. (Why you should care – increasing attacks on Saudi Arabia by the Iranian-backed Houthis could stoke concerns that a Middle East resolution is becoming increasingly distant)

U.S. Treasury Secretary Scott Bessent lauded “very successful” talks with his Chinese counterparts that spanned artificial intelligence, trade and investment ahead of this week’s summit between leaders Donald Trump and Xi Jinping - Bloomberg. (Why you should care – the U.S. has been disappointed by flows of Chinese rare earths as well as reported theft of U.S. AI intellectual property)

Anthropic plans to stage its blockbuster initial public offering in November, later than initially expected, as leaders of the biggest companies in the artificial-intelligence race call for a slowdown in the development of the technology – WSJ. (Why you should care – the article said the company anticipates generating greater than $110 billion in annual recurring revenue this year compared to guidance for more than $65 billion in July)

Economic Calendar:

Markets in Japan are Closed

Fed's Goolsbee (Chicago, Non-Voter) Speaks (6:30 a.m.)

U.S. - Chicago Fed National Activity Index for August (8:30 a.m.)

BoC's Macklem (Governor) Speaks (11:05 a.m.)

Treasury Auctions $92 Billion in 13-Week Bills (11:30 a.m.)

Treasury Auctions $79 Billion in 26-Week Bills (11:30 a.m.)

RBA's Bullock (Governor) Speaks (11:10 p.m.)