A Suckers’ Rally?

Story Highlights:

• Many are fearful the recent run-up will give way to a full-fledged bear market.
• Bear markets are usually accompanied by complacency, not wariness.
• The preponderance of sentiment today is very wary—and suggests a bear market is unlikely.

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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.

'Suckers' Rally' Signaled After S&P 500 April Surge
By Michael Tsang and Nick Baker, Bloomberg

Economy May Face Prolonged Pain, History Suggests
By Greg Ip, The Wall Street Journal

The Big Rally: Checking the Fuel That Fed It
By Michael Santoli , Barron's

Is This Bloodbath Over Yet?
By Morgan Housel, Motley Fool

Stocks March Not to the Beat of Economy
By Mark Gongloff, The Wall Street Journal

Wall Street CEO Chorus Is Singing Out of Tune
By Caroline Baum, Bloomberg

Prosecutors In NY Form Subprime Task Force
By Martha Graybow, Reuters

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.