“Bull markets climb a wall of worry.”
The old adage for stocks, invoked to illustrate their tendency to move most on the gap between reality and sentiment. Worries keep folks from correctly seeing fundamental reality. Worries lower the bar factors like economic conditions, political developments or corporate profitability need to clear to positively surprise investors. The wall is one reason economic growth rates aren’t very meaningful for stocks. (One might argue stocks benefit from slower growth, since slow growth might make worries persist longer.) However, it’s common to see media sound the alarm—warning investors, “we’re not out of the woods” because of some lingering concern or another. Like common discussion of Europe. A question: When would one claim we’re out of the woods? If you follow the adage, the wall of worry implies you’d exit the woods around the time this bull market runs out of steam; when euphoria makes investors see all the positives and magnify them irrationally.
The trouble with all this for investors is many times fears are broadcast far and wide, but they’re rarely scaled or put in context to help folks realize they might be disconnected from reality. False fears are bullish! But a fearful investor may bail on stocks—or may not put investible cash to work. Waiting for the punditry to proclaim, “The coast is clear!” very often means you miss the upside while stocks climb that wall. When the media is proclaiming we’re out of the woods, it’s near the euphoric peak.
Since 2009, we’ve had dozens and dozens of such faulty fears. Some event-driven, others highly publicized opinions—some are near permanent concerns, like high US debt fears, that ebb and flow in acuteness. But far from stopping the bull market, false fears are part of its fuel. Exhibit 1 is an effort to illustrate the prevalent and morphing nature of fears in this bull market. This list is far from comprehensive. The green line is the MSCI World Index. With plenty of worries remaining to this day, it seems to me we’re still—bullishly—in the woods.
Exhibit 1: The MSCI World Index Level and an Illustrated Wall of Worry
Source: Factset, MSCI World Index with net dividends, 12/31/2008 – 04/30/2014.
*Please read this in a loud, boxing announcer-style voice.
**Hard-landing fears now seem to come with a side of Chinese debt fears. Neither are really new, the punditry merely seems to emphasize the debt side more today.