As P.T. Barnum is (falsely) reported to have said, "There's a sucker born every minute." If you've browsed a paper lately, you know many think the recent run-up is made-to-order for suckers. But we view this preponderance of negative sentiment as bullish. That's because prolonged downturns, a.k.a. bear markets, have historically begun in the midst of complacency and / or euphoria, not the widespread wariness of today.
Remember 2000? Despite a selloff on the year of over 9% for the S&P 500 and nearly 40% on the NASDAQ, most of forecasts and headlines were optimistic. We had supposedly become a more productive society that could support higher valuations (whats-it.com didn't need earnings—let alone profits—to be attractive) and stocks would just keep on keepin' on. Of course, what happened next was one of the most brutal bear markets in history.
Fast forward to today. The complacency of 2000 is nowhere to be seen. Take a quick spin through today's headlines and see for yourself.
Too Soon To Relax
Staff, The Economist
You needn't look that hard to find way more like these. So why haven't markets listened to headlines and sold off? Sometimes lost in the hysteria is that markets move based on results relative to expectations, not the absolute results by themselves. When the notion stocks were overvalued relative to rosy expectations eventually took as 2000 wore on into 2001, it was a major shock—and the ensuing bear market reflected that. Today, it's true the economy isn't gangbusters, residential real estate is weak, and financials aren't in terrific shape. But given the headlines of the past year or so, is anyone surprised? Probably not. In fact folks are probably pleasantly surprised the four horsemen of the Apocalypse haven't paid them a visit yet. And in markets, a pleasant surprise is a pleasant surprise.
Short-term market waggles are impossible to predict—and whether this bull market correction is done or lingers for a bit is anyone's guess. Regardless, given today's watchful mood it's hard to argue the maladies making headlines recently have the pricing power to send stocks down significantly for a prolonged period from here. And remember, though riding down a correction is painful, missing the rally back up is even worse. So be wary not just of bear markets, but of folks wanting to scare you out of bull markets. After all, there really is a sucker born every minute.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.