Pessimism Is the Great Humiliator of the 'Great Humiliator'
(AP Photo/Seth Wenig)
Pessimism Is the Great Humiliator of the 'Great Humiliator'
(AP Photo/Seth Wenig)
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Six months swooning—stocks’ 2022 slump has persisted that long, fully doubling market corrections’ typical duration. What makes this slide so tenacious? Many blanche that question as unimportant, presuming it is instead a bear market.  And, it is, officially, being down more than 20% from the peak.  But the difference between being down 24% as I write and 18% in the stock market can be a couple of days and is a distinction without great significance in markets as volatile as equities commonly are.  To me, this decline still seems more like an oversized correction than a bear market—a bit like 2020’s bear, just different in three ways—smaller, duration and what I think is causing the duration. A big long bear requires other juice.

Unlike typical big downturns, corrections or bear markets, which have one or two big scary stories, this one features a relentless swarm of scary sagas--repeatedly stinging sentiment. Recession fretting … sting! Inflation hysteria….sting sting. Fed hikes and rising rate worries … sting sting sting! Ukraine war and putrid Putinism, soaring energy prices, shrill midterm political rhetoric (like the January 6th Commission) Chinese lockdowns … sting, sting, sting, sting!

Maybe I’m wrong, but my sense is all of these are overstated--but collectively create a powerful myopic maelstrom making it nearly impossible for a mere mortal to get his or her head around their totality.  I don’t see any of these, or all together, causing the terrible times that would precede in pre-pricing a big, long bear market by historical standards.  But, today, most disagree with me. It is getting overwhelming statistically. 

Still, the endless swarm  as a barrage has so many seeing nothing but negatives—that it is a counterintuitively bullish signal hinting recovery is nearby and forceful. It is part of the “Pessimism of Disbelief” underpinning all big market rebounds that I’ve written about off and on for decades since my decades of old as Forbes columnist. Here is how it works.

I last wrote about the Pessimism of Disbelief here in May 2020—shortly after stocks’ lockdown-driven plunge bottomed, but long before spirits lifted. Back then, I told you the burgeoning rally was real. Most thought me looney (as is increasingly the case now). Ugly backward-looking data grabbed eyeballs—like advance retail sales plunging over -16% m/m in April while industrial production plummeted -11.2%. Positives provoked “yeah, but” responses. “Yeah but” is one of most powerful contrarian indicators extant, then or ever.  Yes, but was the response to any possible positive.

That was classic Pessimism of Disbelief. It surfaces after big downturns whack sentiment, leading investors to hyper-focus on negatives while ignoring good news—or casting positives as fleeting, soon to morph into even worse negatives. This recurrent market feature is a big bullish signal. In torpedoing expectations, the Pessimism of Disbelief renders any reality short of disaster bull market fuel. Hence US stocks roared 70% from March 2020’s low through that year-end—amid pervasive fear and doubt.

I don’t know where the bottom is in this market.  I’ve never tried to predict short-term swings. But the Pessimism of Disbelief is building again—with a key twist. Typically, one or two main scare stories surround big downdrafts. Consider the past decade: In 2020, fears were laser-focused on a COVID resurgence and renewed economic shutdowns—so markets pre-priced them lightning fast. During late 2018’s -19.8% correction, tariff worries and hedge fund liquidations reigned. In that year’s earlier -10.2% slide, it was inflation and Fed hike fears. 2015 – 2016’s -14.2% double-dip correction featured worries of Chinese “devaluation” and tanking commodities. The -19.4% 2011 tumble was all about America’s debt-ceiling fight and eurozone debt threatening the common currency.

This time? A plethora of big, scary negatives percolate—I tally at least seven. Maybe 10 or more depending on what you entangle into one single story.  Many see dreary forecasts as not negative enough, despite little new information emerging.

When the World Bank recently lowered its 2022 growth projections on widely known headwinds, headlines shrieked they were still “too optimistic.” The “yeah, buts” have returned in full force: Yes, China is reopening after an eight-week lockdown … but with Shanghai already re-imposing some restrictions and Beijing seeing cases climb, how long will it stay that way? True, US inflation-adjusted consumer spending keeps rising despite “sky-high” inflation … but only because Americans are raiding their savings. Jobs numbers are strong … but that only pressures the Fed to hike faster—raising recession’s likelihood. Last year’s weak dollar fears evaporated … but now a strong dollar dooms multinationals and Emerging Markets—potentially triggering a new Asian financial crisis. But, but, but! 

This widespread gloom is forming the coming rebound’s foundation—and it is likely to last long after stocks’ bounce begins. Recall talk of markets “ignoring” negatives as they climbed throughout 2020. Or rampant fears of double-dip recession persisting after 2009’s rebound, throughout 2010 and even into 2011. Today’s cavalcade of fears makes it doubly easy to disdain good news and fixate on negatives.

But remember: “Good” news isn’t needed for a rebound—and clarity is costly. Stocks look forward, moving most on the gap between expectations and reality. Hence the Pessimism of Disbelief’s bludgeoning of expectations means any reality better than disaster likely ignites stocks.

Again, consider 2020. Q2 GDP cratered -31.2% annualized—after the rally began. Consumer spending sank in November, December and February amid renewed business restrictions. Whole industries—like travel and airlines—battled for survival. But by the time anything close to clarity arrived, stocks had already surged as reality still surpassed rock-bottom expectations. Perfection wasn’t a prerequisite then. It won’t be this time, either.

I often call the stock market “The Great Humiliator,” and it’s certainly nailed me this year. But never forget that the Pessimism of Disbelief is one of TGH’s most effective tools for humiliation. Its building presence pushes many to the sidelines, waiting for the other shoe to drop as stocks climb higher and higher. Don’t let it fool you now. Look ahead to the rally before the gloom is gone.

Ken Fisher, the founder, Executive Chairman and co-CIO of Fisher Investments, authored 11 books and is a widely published global investment columnist. For more, see Ken’s full bio, here


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