There's been a laundry list of worries in 2010. But negative sentiment against a backdrop of positive fundamentals is typically bullish.
Stocks have rallied strongly from an earlier correction because economic growth continued and firms kept making profits—even as fears flipped between PIIGS and double-dips.
Among a myriad of factors we consider daily to help confirm our forward-looking market forecast, two broad categories include:
- Fundamentals (eg. firms' profit prospects given productivity and growth)
- Sentiment (eg. how investors feel about fundamentals)
Neither alone tells us what markets will do, but together they are hugely powerful. Historically, the long haul of bull markets is plagued by worry, while bull market peaks are classically periods of contentment, even euphoria. Bull markets tend to be periods of improving or underestimated fundamentals. Bull market peaks show deteriorating or misunderstood fundamentals. In both periods, sentiment is typically detached from reality, and markets move up or down—sometimes slowly and erratically, sometimes sharply—as sentiment catches up to reality.
There's no question which better describes the current market environment. Investors have worried a lot in 2010. And so have we. It's what we do. In this arena, you can't make any forward-looking forecast without seriously weighing probable (and even some improbable) risks. Here's a list (in no particular order) of 2010 risk factors we've considered and covered (often many times) on MarketMinder this year.
Some risks are potentially more powerful than others—a euro implosion or trade war for example (neither of which is likely in our view at the moment). And some sad but ultimately less significant from a capital markets standpoint—unemployment is painful but has simply never been a leading economic indicator.
Viewing this list alone, one might think stocks should be down big for the year. But they're not. Why? Because none turned out as large as they seemed in the moment—or weren't collectively enough of a counterweight to the world's positive factors. And throughout the worry, economies continued growing (even in Europe) and firms kept making profits (hand over fist as a matter of fact). We hope investors keep up the worry in 2011—it's a potent sign the bull has more gas in the tank.