Can anything stop this bull market? Seemingly ever fewer investors think so. The unadulterated panic ruling markets last February and March seems ancient, with increasingly optimistic pundits seeing gains ahead. That view seems justified. But its rapid spread symbolizes a warning: Just as you had to conquer your emotions to reap this nine-month-old bull market’s gains to date, you now must keep emotion at bay—just a different one. Failing at that risks falling prey to the market’s next trick: getting fooled by greed. Here’s why.
Investment legend Sir John Templeton famously said, “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” We’ve seen that pattern evolve quickly since last winter. After the coronavirus’s spread sparked unprecedented economic lockdowns, panic reigned. From mid-February to mid-March, the percentage of bearish individual investors tabulated by the American Association of Individual Investors (AAII) nearly doubled. It also showed bulls went from outnumbering bears by 14 points in mid-February to bears outnumbering bulls by 29 points in late May, during this bull market’s pessimistic phase. Fund managers’ collective equity allocation plunged in March and again in April, sinking to its lowest level since March 2009. Managers’ cash balances surged to their highest level since the 9/11 attacks. All backwards in retrospect.
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