Fisher Investments Editorial Staff

Negative Needles in Positive Haystacks

By, 07/02/2010

Story Highlights:

  • Given a negative first half year, many investors wonder what the remainder of 2010 has in store.
  • Short-term past performance isn't indicative of the near-term future—as exemplified many times in the past.
  • Given strong economic fundamentals globally, oft-blamed drivers of a potential "double-dip" appear unlikely to derail growth.
  • Behind it all, fear has been the biggest influencing factor of late—but it's key to look at the entirety of economic activity and not simply focus on seemingly negative data points.


As 2010's first half ends, most investors aren't exactly popping champagne. Since the ongoing correction began mid-April, investors have dealt with a choppy and frustrating stock market. And after six months and negative returns for the year, many wonder if this portends negative full year returns.

Short-term performance isn't at all indicative of the near-term future—not the first 10 days of January, not the first quarter—and not the first half. Many past years have shown negative returns even well beyond the midway point of the year and finished positive for the full year. In fact, every positive market year since 2004 has been negative later in the year than this. In 2004, on October 26th, the S&P was negative for the year. 2005? November 1st. 2006? July 21st. 2007? November 26th. 2009? July 13th. Stocks can move a long way in a short period —and years can be back-end loaded. A negative front half is no predictor for the back half.

Given strong global economic fundamentals continuing to show growth, in our view, it's more likely stocks overcome emotions driving the current correction in the second half. True, there are still some negatives existing, like Greece. But the existence of some negatives is almost constant—an irrational focus on them, however, is the lifeblood of a market correction. Recently, much of the double-dip talk was centered across the pond in Europe. But if EU debt issues are to drive a second recession, then why did European stocks outperform US and global stocks in June (in fact, since May 10th)? Thursday, folks fretted reports from China of slower-than-expected growth in its Purchasing Managers Index. Slower exports to Europe, disruptions caused by higher minimum wages, and restrictions on the secondary property market all weighed. But note, the index was expansionary—for the 16th month in a row. And just a few months ago, many fretted super-fast Chinese growth would lead to overheating. Now seemingly moderating growth (which could easily ramp up again) gives rise to the worry it's not super-fast any longer! US data is also positive for the most part. Just today, US manufacturing was reported expansionary as well. Moreover, while folks again fretted slightly rising weekly jobless claims, Challenger, Gray, and Christmas reported decade lows in planned corporate layoffs. And consumer spending was up earlier this week.

Stocks lately have moved counter to fundamentals in the short-term—frustrating! But 1984, 1998, 2004, 2005, and 2006 all had negative returns late in the year with no economic downturn—and many more examples exist. Many investors selling stocks today aren't actually selling today's economic fundamentals—they're selling 2008's financial panic two years late.

In search of timely justification, sellers tend to ignore positive haystacks in search of negative needles (which can be found) to support the decision—in fact, pessimistic sentiment has a way of psychologically flip-flopping the two. At this time, it's critical for long-term investors to have completed post-mortems on 2008 long ago and look with clear minds at economic statistics and trends of 2010. It's fine and healthy to assess negatives, but wiser still is weighing them against positives. Seeing steep yield curves, cash-rich companies with strong balance sheets globally, economic growth in developed and Emerging Markets, sharply increased earnings, rebounding global trade, and dirt cheap stocks, it's clear the economy is progressing—and has more than ample drivers for a positive close to 2010.


*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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