“The older an argument is, the less power it has.”
Our boss, Ken Fisher, wrote that in Forbes on March 13, 1995, explaining why long-running inflation fears were too old and too tired to end the bull market. It sprang to mind yesterday, when we read for the 1,947th time that the eurozone is on the precipice of a dismal spiral of deflation, depression and doom.
It might not feel this way, but these eurozone jitters are the same old euro collapse fears folks have had for years, just dressed up in new clothes. Most folks might not fear the common currency’s splintering these days (though, fear hasn’t completely died out), but you can’t go far without some headline telling you the eurozone will be a black hole in the world economy for a long time to come. The same old fear. It just went through a metamorphosis.
Old rehashed fears like this are what Ken calls cud—things we chew over again and again. The eurozone was already old cud when Ken mentioned it in his January 21, 2013 column, “Don't Be a Cud Chewer”: “If it’s widely known, it’s either wrong or will have little impact on stocks. Fear of Europe? We’ve fretted over it for three years while stocks rose.”
Now we’re closing in on five years of eurozone fears, and stocks are still up. The eurozone hasn’t taken down the world yet—nor has it gone anywhere near as badly as feared. It didn’t splinter. It went into recession, but that ended after 18 months. Global growth continued that whole time. World stocks rose 34% while eurozone GDP contracted.[i] Was the region in great shape? Heck no! But it didn’t have to be. With expectations so dismal—and deep fears baked into stock prices—outcomes that ranged from “yuck” (two Greek defaults) to “meh” (the uneven recovery) were good enough to keep the bull market going strong.
The same is true today. Markets move most on the gap between expectations and reality. If folks fear the eurozone will turn Japanese and have a decade or two of deflation and shrinking nominal GDP, and in reality it just plods along, that plodding is a nice surprise. With The Conference Board’s LEI in an uptrend, most Purchasing Managers’ Indexes still comfortably above the dividing line between contraction and growth and money supply growing, plodding growth and inflation look a whole lot likelier than deflationary doom.
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[i] FactSet, as of 09/24/2014. MSCI World Index return with net dividends, 09/30/2011 – 03/31/2013.