John Hulcher
Unconventional Wisdom

Doubting Thomas Versus The Proverb

By, 11/12/2009
Assuming you agree March 9th marked the bear's bottom, we're eight months into a new bull and the S&P 500 is up roughly +60% (as of 11/11/2009). Global stocks, particularly emerging markets, are up a lot more. Even with some bumps along the way, overall it's been quite a nice ride.

Yet skepticism abounds. Many are questioning this stock recovery, offering instead reasons why it's an illusion—not a bull market, but the greatest sucker's rally in history. Even NYSE Chief Duncan Niederauer questioned stocks' gains back in April and did so again in September. Et tu, Duncan?

Geez! It's almost taboo to acknowledge recent gains—as if they were ill gotten. It's not surprising many doubt the bull market. Worries still abound, including (but not limited to): Unemployment north of 10%, protectionist saber rattling, government intervention in financial markets, record budget deficits, fears of central bank tightening, inflation, deflation, stagflation, H1N1, and, well, I could go on. Add to those fears a volatile (and slightly negative) October for stocks, and you may also be wondering if the recent recovery is for real, or just fodder for suckers.

Is it a sucker's rally? Could be, but probably not. Global stocks have never before seen a bear market rally this sizeable—which reduces the odds. More good news: Historically, bull markets are longer and stronger than bear markets (bulls last 57 months and rise +165% on average, while bears last 21 months and fall 39% on average*). But despite this fact, we appear to spend more time questioning bull markets than believing in them. (My colleague delves into the mental gymnastics behind this weird phenomenon.) 

Disbelieving a bull market is nothing new, and suspicion is prevalent these days. After last year, some feared we'd never see another bull again (others have long been sure of it). Doubt can be costly when investing. Investors spent much of the 1990s doubting and dodging one of the greatest bull markets in history. By early 1997, over six years and about +150% into the bull, folks were not only skeptical of the run, but many warned stocks had become far too expensive and were soon going to crash. The naysayers were right—if by "soon" they meant another three years and roughly +90% in additional S&P 500 gains. I don't know about you, but I like +90% returns (and bull markets), and I don't want to miss any part.

I'm not promoting blind optimism or the idea of a linear bull—stocks never go straight up (or down), and your portfolio should always be consistent with your long-term objectives. Plus, a certain level of skepticism when investing is good, assuming it's directed in the right areas and in the appropriate dosages. But blind pessimism is no more constructive than blind optimism. In fact, blind pessimism can hurt more since, overall, stocks rise more than they fall. If you have long-term growth goals, bull market returns are essential to helping you reach them. If you're inclined to dismiss (or distrust) rising stocks for whatever reason(s), doesn't it seem worthwhile to scrutinize said reason(s), as they may cause you to miss precious bull returns?

While it may not seem like it, the US economy is on the mend and certainly doing much better than many expected. Overseas economies, particularly emerging markets, are doing even better. Remember, stocks look forward. That the world is returning to growth mode and earnings have been soundly beating expectations tell us stocks have likely been getting it right since March, not leading us down a primrose path.

Any Doubting Thomas should realize the bull could pass them by while they await some tangible "all clear" signal. Though by the time investors en masse are promoting stocks unquestionably (remember early 2000?), it's probably the exact time to start questioning them.

Bull markets climb a wall of worry, and there are myriad worries garnering enormous popularity right now. Maybe you have your own wall of investment worries. If so, perhaps it's time you tried climbing it. You just might find it's more enjoyable (and profitable) on the other side. Again, we're about eight months and +60% into the new bull market. Are you questioning or believing?

Source: Google Finance

*Historical S&P 500 data from Standard and Poor's Index Services. Based on the technical definition that a decline of 20% or more constitutes a bear market.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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