After a heartwarming 2021 start, pundits now preach peril once again. Like:
QE is ending! The witches’ stew of COVID brews. Inflation, inflation and stagflation strike. China’s real estate woes threaten a “Lehman moment”--dooming global growth. Tax hike hype and debt ceiling drama dead ahead.
But don’t let all this chatter depress you. For stocks, this unease over well known, pre-priced or flat-out false fears signals a pause in early 2021’s building froth—and points to more bull market ahead. Here is why you should cheer the fear.
In January, I told you sentiment had evolved lightning-quick since March 2020’s bear market bottom—with vaccine victories and election clarity muting most pundits’ paranoias. Forecasts for US stocks were near-uniformly bullish, if only mildly. Euphoria had emerged in faddish market corners. Initial public offerings, especially “blank check” special-purpose acquisition companies (SPACs), were soaring and soon set records. Investors went gonzo for crypto, as all its ilk spiked spectacularly. Non-fungible tokens (NFTs)—curious digital collectibles—sold mysteriously for big bucks.
Increased optimism was justified. COVID vaccines’ arrival drove re-openings, recharging growth. But always remember investing legend Sir John Templeton’s wise words: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” Back then, euphoria was percolating—signaling we were far later in the bull market than early-cycle evangelists believed.
Now? Expectations of a long-lived boom ahead have ground down to a slow grind of daily fears—new and old alike. What I’ve long labeled the Fret-O-Meter started pinging paranoia.
COVID’s Delta strain slowing growth amid vaccine mandate battles—ping! Looming Chinese defaults—ping! Renewed tax hike chatter—ping! Soaring shipping costs and supply chain delays set to ruin Christmas—ping ping! The Fed talking QE tapering … potential hiking interest rates—ping ping ping!
Signs of slipping sentiment run deep. Global fund managers’ economic growth expectations tumbled from earlier this year, according to Bank of America’s September survey. Only 22% of individual investors are bullish on stocks for the next six months—the lowest reading since July 2020—while nearly 40% are bearish, the American Association of Individual Investors’ latest sentiment poll shows. Consumer confidence has tumbled since June. Less than 40% of US small businesses see economic conditions improving over the year ahead—down from 67% in March.
The shine is also off IPOs and SPACs, as multiple blowups, lawsuits and regulatory worries stunned them into sudden stall—with several Senators now putting SPACs in their crosshairs. Bitcoin? It has given back most of the year’s early surge.
Still, we’re far from panic or even broad pessimism. Brokerage account opening rates, funds’ equity allocation levels, sporadic meme stock bounces and ongoing NFT craziness all keep reflecting a generally optimistic environment. We are still later-stage, but later-stage doesn’t mean end-stage. Moderating sentiment recharges the bull market with extra room to run.
Embrace the moderation. Rising Fret-O-Meter pings are high-octane stock market fuel. Why? Because surprises move markets most. Euphoric sentiment can juice stocks briefly—but eventually it tees up the negative surprises that slam bull markets. The Tech bubble’s bursting in 2000 is the quintessential example of expectations simply exceeding achievable levels, with any negative straw set to break the bull market’s back. That isn’t now.
Today’s fretting means we are far from those bubbly days. It means perking fears are likely and largely pre-priced. Delta’s drag on some industries, like travel and hospitality? Unfortunate, but well known from here to Timbuktu—pre-priced and impacting areas of the stock market that are too small in aggregate to matter much! Supply chain bottlenecks and surging shipping costs? Frustrating, but now very old and widely dispersed news—hence pre-priced, too!
While those issues have legitimate economic impacts, many resurgent fears are overblown—or flat-out false. Tax hikes? Even new, heavily watered down proposals stand little chance of making it through Congress without further dilution—and, as I explained in April, history shows they aren’t a threat to stocks even if they do.
QE taper terror? Pundits get this inside out, upside down, backwards, twisted and flip-flopped. Tapering is not only not bearish—it is beautifully bullish, as I told you in my last column. Chinese debt? Rising defaults have sparked fears for years—even Evergrande’s issues were well known since last September. They lack the surprise power—and the scope—to derail global stocks.
I often say false fears are always, everywhere and forever bullish. Hence: As markets weigh these worries, they tee up positive surprise—or even unconscious relief. It doesn’t mean you need massively touted good news. Anything better than what markets previously weighed will do.
While Templeton’s market cycle maxim is incredibly prescient, the path from pessimism to skepticism, skepticism to optimism and optimism to euphoria isn’t some straight line. It is wiggly—as recent weeks have shown. For now, the Fret-O-Meter is pinging aplenty. Welcome the worry. Cheer the fear and know the renewed worries are your investing friends.
