'Clarity' Is a Very Costly Word. Stocks Never Wait For It
Stocks’ surge from March lows may or may not sustain, but the next bull market’s base is building now. Few pundits or forecasters agree (citing near endless disastrous news) as most see the rally as “disconnected from reality,” and a limp central bank “sugar high.” They're blinded by an inability to see positives is the best market un-news of all. They’re falling prey to what I call the “Pessimism of Disbelief” which I last cited in April, 2010—a cyclical feature fueling all new bull markets. Here’s how:
Negativity always reigns early in bull markets, as the preceding bear market crushes investors’ psyches. Typically, bear markets start slowly, later accelerating to end in a panic-inducing fury. Consider: In the 13 bear markets before 2020, the S&P 500 averaged 39.9% declines, lasting 21 months. But over half that drop—22.0%—came in the final three months. That crescendo of plunging prices leaves most investors shell-shocked, and incapable of optimism.
This time was different only in that it started with the fastest-ever drop off an all-time high, as unprecedented global COVID-19 governmental restrictions made investors pre-price economic contraction near-instantly. The S&P 500 fell from all-time highs to bear market territory in just 16 trading days. But the backdrop—sheer crescendoed panic—is as old as stock markets themselves.
Dread makes people forget one simple truth: Bull markets always follow bear markets—but start sneakily, when battered investors don’t expect it. With expectations already ultra low, virtually any outcomes boost stocks. In route, most investors disavow any rebound as a sucker’s rally. They over emphasize bad news but spin potential positives into negatives. That’s the Pessimism of Disbelief.
When the March, 2009 bull market started, the longest ever, few believed so-called “stimulus” programs would buoy stocks. Regardless of those plans’ efficacy, or your views of them, it’s the Pessimism of Disbelief making people think it won’t work in the real world that makes it work for stocks. Back then, stock forecasters believed these plans would drive massive inflation or a debt calamity. Didn’t happen.
Most believed the plans were also insufficient, fearing a second shoe dropping would stoke the dread mythological “double-dip” recession. Yet 2010 saw growth. American industrial production grew 5.5%. Retail sales jumped 5.7%. GDP grew 2.6%. Despite similar results globally, few cheered. Instead, worries morphed to fretting that improving economies would cause central banks to tighten, squashing stocks. Pessimists dismissed any optimism as Pollyannaish.
The Pessimism of Disbelief appears after every bull market’s start. It’s building now. Any good news quickly suffers negative spinning. One example: Pundits once fretted this contraction would last into 2021. Now, many forecasts call for 2020 third quarter GDP growth. The negative spin? Most say a rebound is only possible because Q3 GDP is compared to Q2—a deeply depressed base. True—but also true of every recovery ever. That is arithmetic, not analysis. They talk of a long crawl for GDP to regain pre-recession highs. Maybe true, but irrelevant to stocks.
Most fixate on current economic data, like April’s staggering -21.2% y/y U.S. retail sales plunge, or America’s historically horrendous unemployment data. Few can imagine stocks rising as data like these pulverize us. They forget the March, 2009 super bull market began when US industrial production plunged -14.6% y/y. Retail sales were down -13.3% y/y. Q1 2009 GDP? -4.4% annualized. Growth didn’t resume until Q3—and even then, GDP grew just 1.5%. But the S&P 500 and global markets were already up 36.9% and 41.5%, respectively. Most investors, myopically hyper-focused on a dreadfully dreary present, couldn’t contemplate that rise. Just like now.
Remember: Stocks always look ahead, often fairly far. For them, the question isn’t whether new data are good, bad or putrid. It’s more a question of are they way worse than expected? The further expectations fall, the harder it becomes to answer “yes”—making it easier for stocks to rise. Ditto for any potential second COVID wave. While that could be very bad, would it be worse than feared? If the Pessimism of Disbelief persists in bludgeoning sentiment, that would take an awful lot.
What those blinded by the Pessimism of Disbelief crave is clarity—that the bull began in earnest and they won’t be suckers, buying in too soon. But “clarity” is among investing’s costliest words. Stocks never wait for it. Too many investors do and, as a result, miss big early gains. Don’t be among them.