What You See May Not Be What You Get

Story Highlights:

• Pessimism in news abound. It's not surprising to see an over-abundance of negative news during economic recessions.
• Economic data, especially unemployment numbers, will probably stay rocky in the months to come. When they do, expect headlines to take even more bearish tones.
• History shows during recessions, the stock market moves upward well ahead of economic recovery—bear markets bottom before the economy does.
• The market is a powerful discounter of widely known information and the expectations that information shapes. Economic recovery will be priced into markets before there's a wide sense that it's happening.

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Media pessimism is like the inevitable office cold—it cycles like a never-ending merry-go-round. Lately, the thrum of negativity seems more pervasive than ever, perhaps bolstered by the formal declaration of recession earlier this month.

News about falling consumer spending, rising unemployment, and contracting US GDP dominated headlines last week. If you're alarmed now, hold on to your seatbelts—we're likely to see more negative economic news ahead. Economic data, especially unemployment numbers, will probably stay rocky in the months to come. When they do, expect headlines to take even more bearish tones. But keep an eye on the stock market, because it might do something no one is expecting or noticing—starting a new bull market in earnest.

Believing markets and the economy move together, or that the economy leads the market, is a common misperception. History shows during recessions, the stock market moves upward well ahead of economic recovery—bear markets bottom before the economy does. As noted several times in this space, the market is a powerful discounter of widely known information and the expectations that information shapes. This means the stock market leads the economy, not the other way around. Economic recovery will be priced into markets before there's a wide sense that it's happening. People will see an ongoing recession and continue to call it a bear market. But this is a mistake akin to misarranging the cart and the horse.

The prevailing view will be pessimistic for some time. There will be doubts about the effectiveness of recent US government (and worldwide government) stimulus actions. There will even be doubts about eventual recovery! Economic data ahead may become more dismal even as the foundation for recovery takes shape. Just as it takes time for a recession to be recognized (at least officially—this recession was heralded in the newspapers for years before it started), it'll be sometime after recovery takes place before folks recognize it as so. By then, the market will undeniably be a bull, and investors left waiting on the sidelines for signs of economic recovery will have missed the typically large, profitable upswings of a new bull market. Now, that's cause for pessimism.