- Friday was another gloomy day for stocks, with new threats to Bernanke's re-confirmation dominating headlines.
- Things seem lousy today, and folks fear stocks can't rise in this environment.
- We call this the pessimism of disbelief—all bad news is bad, and any good news is wrong.
Friday capped a tough week for stocks. If Wednesday belonged to Massachusetts and Thursday Obama, Friday was dominated by a new Democratic threat to Bernanke's re-confirmation. Nothing like piling more uncertainty on an already lousy week.
Though we may be treated to some political mugging and foot-dragging, Bernanke likely gets his second term. That doesn't mean the mugging and the foot-dragging in the meantime can't roil stocks some and create still more spooky headlines. We call this the pessimism of disbelief: The view the world has too many insurmountable problems for stocks to rise. Bad news is really bad. And any good news is just wrong, because good news can't exist. Or good news is something that will turn bad.
This is how the pessimism of disbelief works. Take the economy, for example. People fear the recovery isn't real and lasting. That's bad. But they also fear more stimulus will only increase the deficit and debt, stoke inflation, and fuel socialism—there's no point trying. So the problem is bad, but so is the proposed solution. You can't win.
You can see it in any headline you pick. More examples: Banks are bad, culpable for all of today's supposed problems, and "should" be punished for risky behavior. And though blaming the recent financial panic on the reversal of Glass-Steagall was trendy just months ago, Obama's plan (admittedly, exceedingly vague and blurry), reminiscent of Glass-Steagall separation of commercial from investment banking, was suddenly bad again. Solution worse or as bad as the problem? That's the pessimism of disbelief.
Folks worry China is too hot, a bubble in the making, and too-fast growth coupled with their massive recent monetary stimulus will cause inflation. But with every slight tightening gesture (e.g., on Thursday, China's benchmark yield rose 4 whole basis points), folks panic about just the reverse—a too-early exit will stall the recovery. Perhaps investors are scared lending would slow—but lending has been robust, and a little-less-than-robust is hardly a freeze. Lots of lending is bad, but slightly less than that is bad too…
Equally confusing? How good news is seen as rarely true and often bad. Like Goldman Sachs' fourth quarter 2009 earnings, which beat expectations by nearly $3 per share. Lest we get excited, the headlines remind us: These earnings aren't "as good as they look." Great news—profits!—is couched as a dirge on lower employee compensation and goes well with the myriad stories predicting bank suffering under Obama's new regulatory plans.
There are countless other examples, like the state-by-state employment figures, which showed an unchanged national rate in December yet still managed to "darken" the jobs landscape. And last week's market downside makes these stories seem even scarier than they likely otherwise would.
This is a classic bull market phenomenon—the proverbial wall of worry. Stocks don't march straight up in a bull market—never do. They have to fall back some to keep feeding the pessimism. Keep in mind, the three-day 5% drop in the S&P 500 (through Friday) is the worst in over 10 months. Bad! But those previous three days ended on March 9th, before a massive 68% rally. But you won't read about that, or people will say, "Yeah, but, it's different this time." That's the pessimism of disbelief.